Chapter 8, Problem 5MCQ

To determine

The question requires us to determine the reason for the inefficiency of effective price ceilings.

Explanation of Solution

A price ceiling is a method used by the government to 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.

A price ceiling less than the equilibrium price generates a persistent shortage of products in the market because at a price ceiling, consumers are willing to buy more products as they are getting them at a lower price, while the producers are willing to supply less as they are getting a lower price for their product. So, the quantity demanded exceeds the quantity supply and results in a shortage of the product in a market.

Price ceiling generates various types of inefficiencies in the market like inefficient allocation of sales, a persistent shortage of products, less-quality products, black-marketing, wastage of resources, and a temptation for corruption and bribery in the economy. Despite the various inefficiencies, the price ceiling benefits some consumers.

So, option “e” or “all of the above” is correct.