Chapter 8, Problem 3MCQ

To determine

The question requires us to determine the effective price ceiling.

Explanation of Solution

A price ceiling is a method used to control prices by the government set the price of a product or service in the market. Purchasing or selling that product below that price would be a punishable act. The government usually sets the price ceiling below the equilibrium price to safeguard the interest of some consumers.

For example, to protect the interest of renters, the government set a price ceiling on rents that is lower than the equilibrium price so that rent-seeker can get the houses at a lower rent, but it generates a persistent shortage of houses in the market because, at a price ceiling, rent-seekers are willing to rent houses as they are getting them at a lower price, while the house-owners are willing to supply less as they are getting a lower rent for their houses. So, the quantity demanded exceeds the quantity supply and results in a shortage of houses in a market.

So, to be effective a price ceiling must lie below the equilibrium price.

Option “b” is correct.

The other options are incorrect because the price ceiling will be ineffective when it sets above or equal to the equilibrium price. The federal government as well as the state government can make this law on any product including housing, but it is not necessary that it must be set on the housing market only.