Price ceilings are intended to address the problem of
Multiple Choice
Inefficiency in production.
Inequity in the distribution of goods and services.
Business bankruptcies.
Shortages.
The correct answer and explanation is :
Correct Answer: Shortages
Price ceilings are government-imposed limits on how high a price can be charged for a good or service. They are typically implemented to make essential goods, such as food, rent, or medicine, more affordable for consumers. However, while the intention is to protect consumers from excessively high prices, price ceilings often lead to shortages rather than equitable distribution or efficiency improvements.
A shortage occurs when the quantity demanded exceeds the quantity supplied at the controlled price. When a price ceiling is set below the market equilibrium price, suppliers are less willing or able to produce and sell the good because they receive less revenue. Meanwhile, consumers demand more of the product because of its artificially low price. This mismatch between supply and demand results in insufficient availability of the good.
For example, in the case of rent control, where the government sets a maximum price landlords can charge for rent, property owners may decide to convert rental units into other types of real estate, reduce maintenance, or avoid building new apartments altogether. As a result, fewer rental properties become available, leading to a housing shortage.
Similarly, in the case of gasoline price ceilings, if the government sets a maximum price lower than the market rate, suppliers may reduce production or stop selling altogether, leading to long lines at gas stations and limited availability.
Overall, price ceilings can create unintended consequences such as black markets, lower product quality, and inefficiencies in resource allocation. While they aim to make goods more accessible, they often lead to persistent shortages, reducing overall economic welfare.