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Chapter 3: Problem 27

Does a price ceiling attempt to make a price higher or lower?

Short Answer

Expert verified
A price ceiling attempts to make the market price lower than it would naturally be in a free market. Its primary purpose is to protect consumers from excessively high prices for essential goods or services, especially during times of crisis or market failure. By setting a maximum price below the market equilibrium price, it intends to keep prices affordable and increase accessibility for a majority of consumers. However, price ceilings may also lead to unintended consequences, such as shortages or reduced quality of goods if suppliers find it unprofitable to continue production at the mandated price.

Step by step solution

01

Definition of Price Ceiling

A price ceiling is a government-imposed maximum price or limit that businesses can charge for a specific good or service. This measure is typically used to prevent prices from rising too high and becoming unaffordable for consumers. A critical aspect of price ceilings is that they are set below the market equilibrium price.
02

Purpose of Price Ceiling

The primary purpose of a price ceiling is to protect consumers from facing excessively high prices for essential goods or services, generally during times of crisis or market failure. A price ceiling is aimed at keeping prices affordable, increasing accessibility for a majority of consumers, and ensuring an adequate distribution of goods and services.
03

Effect on Market Price

A price ceiling attempts to make the market price lower than it would naturally be in a free market. By setting a maximum price, it reduces the price for consumers, potentially resulting in increased demand, but it may also lead to some unintended consequences, such as shortages or reduced quality of goods if suppliers find it unprofitable to continue production at the mandated price. In conclusion, a price ceiling aims to make the price of a good or service lower in the market to protect consumers and ensure affordability. It is important to consider both the intended benefits and the possible unintended consequences when implementing price ceilings in a market.

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Most popular questions from this chapter

The computer market in recent years has seen many more computers sell at much lower prices. What shift in demand or supply is most likely to explain this outcome? Sketch a demand and supply diagram and explain your reasoning for each. a. A rise in demand b. A fall in demand c. A rise in supply d. A fall in supply

Why would a free market never operate at a quantity greater than the equilibrium quantity? Hint: What would be required for a transaction to occur at that quantity?

Why do economists use the ceteris paribus assumption?

A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis, how do you think the tariff reduction will affect the equilibrium price and quantity of flat screen TVs?

How does a price ceiling set below the equilibrium level affect quantity demanded and quantity supplied?
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