<PRICE CEILING> 

• A government may in some situations set a legal MAXIMUM PRICE for a particular good; this is called a 'PRICE CEILING'. It means that THE PRICE THAT CAN BE LEGALLY CHARGED TO THE CUSTOMERS for the good MUST NOT BE HIGHER THAN THE LEGAL MAXIMUM PRICE.

• A PRICE CEILING is primarily SET IN ORDER TO PROTECT THE CONSUMER, as the government may decide that the FREE MARKET PRICE IS SET TOO HIGH given the importance of the good, ESPECIALLY FOR LOW-INCOME EARNERS WHO CAN'T AFFORD MORE EXPENSIVE ALTERNATIVES.

• As such price ceilings are USUALLY PUT ON STAPLE FOODS, such as bread, milk, rice, and sometimes low-cost housing, which could all be described as 'NECESSITIES' for LOW-INCOME EARNERS WHO CAN'T AFFORD MORE EXPENSIVE ALTERNATIVES.

• RENT CONTROL (NEW YORK, MUMBAI)

• SALARY CAPS (NFL, MLB...)

• SURGE CHARGING (UBER INDIA)

• BOTTLED WATER (INDIA) 

• STAPLE FOODS (MEXICO)

• NON-PRICE RATIONING: As we have seen the implementation of a price ceiling results in a SHORTAGE, given that the price mechanism can no longer achieve its rationing function, this raises the question, HOW WILL THE INSUFFICIENT QUANTITY SUPPLIED BE DISTRIBUTED? This can now only be achieved through NON-PRICE RATIONING METHODS, including: 

  • FIRST-COME-FIRST-SERVED

  • QUALIFICATION CRITERIA

  • TRADITION

  • FAVOURITISM

  • ETC...

• Without some form of enforced qualifying criteria (e.g, must have income less than $10k) NON-PRICE RATIONING METHODS may NOT GUARANTEE THAT LOW-INCOME EARNERS WILL GET THE GOOD AHEAD OF HIGH-INCOME EARNERS.

• For example, a high-income earner could still be ahead of a low income-earners if the distribution is based on a queuing system (first-come-first-served)

• Clearly, with any shortage, there will ALWAYS BE BUYERS WILLING TO PAY MORE and SELLERS EQUALLY WILLING TO ACCEPT MORE, hence this encourages ILLEGAL  UNDERGROUND (or PARALLEL) MARKETS to appear.

• Of course, these illegal activities need POLICING which cost the government valuable resources (Opportunity cost)

RENT CONTROLS consist of a maximum legal rent on housing, which is below the market-determined level of rent (the price of rental housing). It is undertaken by governments in some cities around the world to make housing more affordable to low-income earners. Consequences of rent controls include:

• Housing becomes more affordable to low-income earners

• A shortage of housing, as the quantity of housing demanded is greater than the quantity available

• Long waiting lists of interested tenants waiting for their turn to secure an apartment/flat

• Underground market for sublet apartments at rents above the legal maximum 

• Run-down and poorly maintained rental housing because no need to compete on quality.

FOOD PRICE CONTROLS: Some governments use food price controls as a method to make food more affordable to low-income earners, especially during times when food prices are rising rapidly (for example, in the period 2008−9). The results of food price controls follow the same patterns as discussed above: 

Lower food prices and greater affordability; 

Food shortages as quantity demanded is greater than quantity supplied; 

Nonprice rationing methods (such as queues) to deal with the shortages; 

Development of underground markets; 

Falling farmer incomes due to lower revenues; 

More unemployment in the agricultural sector; 

Misallocation of resources; 

Possible greater popularity for the government among consumers who benefit.

FIND A REAL WORLD EXAMPLE OF A PRICE CEILING, AND THEN WRITE A 800+ WORD ANSWER TO THIS QUESTION:

EXPLAIN THE MARKET, ECONOMIC, AND STAKEHOLDER IMPACTS OF THIS TYPE OF GOV'T INTERVENTION. 

ANSWER MUST INCLUDE:

1. DEFINITION

2. RATIONALE

3. MARKET & WELFARE DIAGRAMS 

(Hand-drawn and uploaded)

NOTE: YOU WILL HAVE 2 DAYS TO COMPLETE THIS AND IT MUST BE SUBMITTED THROUGH TURNITIN.

ESSAY PLAN

• ...A price ceiling refers to a form of government intervention which involves…

• ...It is usually imposed for the following reasons…

• ...In the case of the price ceiling imposed on rental accommodation in Mumbai, it has had the following impact on the market….

• ...In Fig 1. We can see that the price has fallen from…..shortage….

• ...In terms of the economic outcomes that will likely occur…. black market, poor quality..., low-income earners will not all receive the housing because the rationing system is based on first come first served, favouritism etc…

• ...As for the winners and losers in terms of welfare, we can see in fig 2…