Price floors and ceiling prices both
Multiple Choice
a. cause shortages
b. cause surpluses
c. cause the supply and demand curves to shift until equilibrium is established
d. interfere with the rationing function of prices
The Correct Answer and Explanation is:
Correct Answer: d. interfere with the rationing function of price
Price floors and price ceilings are government-imposed limits on how low or high a price can be charged for a product or service. These controls are often enacted in markets where policymakers believe the equilibrium price (where supply and demand meet) is unfair to either consumers or producers.
A price ceiling is a maximum price set below the equilibrium price, such as rent controls. It is designed to help consumers by keeping prices affordable. However, this artificially low price increases quantity demanded and decreases quantity supplied, resulting in shortages.
A price floor, on the other hand, is a minimum price set above the equilibrium price, such as minimum wage laws or agricultural price supports. It aims to ensure producers or workers receive a minimum income. But this higher-than-market price reduces quantity demanded and increases quantity supplied, leading to surpluses.
While choices a (shortages) and b (surpluses) are correct in specific contexts (ceilings cause shortages, floors cause surpluses), they are not universally true for both types of controls. Thus, they are incorrect as general answers to this question.
Choice c, stating that price controls cause supply and demand curves to shift, is also incorrect. Price floors and ceilings do not shift supply or demand curves themselves; rather, they cause movements along these curves, leading to disequilibrium in the market.
The most accurate and comprehensive answer is d: these controls interfere with the rationing function of prices. In a free market, prices act as signals to both buyers and sellers, allocating resources efficiently. By imposing ceilings or floors, the government disrupts this signaling mechanism. As a result, resources may be misallocated, and the market becomes inefficient. This interference often leads to non-price rationing mechanisms such as long lines, favoritism, or black markets.
Thus, d best captures the overarching economic impact of price floors and ceilings.
