A binding price ceiling will have the following consequences:
a. There will be downward pressure on prices until quantity demanded equals quantity supplied.
b. There will be upward pressure on prices until quantity demanded equals quantity supplied.
c. There are no consequences to a binding price ceiling.
d. The quantity demanded will always exceed the quantity supplied.
e. The quantity demanded will always be smaller than the quantity supplied.
The correct answer and explanation is:
The correct answer is d. The quantity demanded will always exceed the quantity supplied.
A binding price ceiling is a government-imposed limit on how high a price can be charged for a good or service. It is called “binding” when the price ceiling is set below the market equilibrium price, meaning that the maximum allowable price is less than what the market would naturally set without interference. In such a scenario, the price cannot rise to the equilibrium level where supply equals demand, causing an imbalance.
When a price ceiling is set below the equilibrium price, the immediate effect is that the price falls. This lower price increases the quantity demanded by consumers, as goods become more affordable. However, the price reduction also makes it less profitable for producers to supply the good, leading to a decrease in the quantity supplied. As a result, there is a situation where the quantity demanded exceeds the quantity supplied, creating a shortage in the market.
This shortage is a key consequence of a binding price ceiling. Consumers will find that while many want the product at the lower price, there is simply not enough of it available. This situation often leads to long waiting lines, black markets, or rationing systems where goods are distributed unevenly or unfairly.
In contrast, if the price ceiling were set above the equilibrium price, it would not be binding because the market would naturally settle at the equilibrium price, and there would be no significant impact on supply and demand. But when it is set below equilibrium, the shortage is inevitable, leading to inefficiencies and potential negative economic consequences for both consumers and producers.