Price ceiling is defined as the state imposed restriction regarding the pricing of a product beyond a particular limit. The major reasons why many governments will attempt to predetermine the prices of a product below a particular limit is that they endeavor to guard customers from abuse by traders. Nevertheless, the impacts of prices manipulation may injure the economy if done for long periods with no adjustments.
The impact of a bigger market price as compared to the price ceiling is a shortage formation in the market. Thus, this signifies that quantity demanded is below quantity supplied in that particular market. Suppliers will see their profits are reducing compared to restricted leading their exit in the market. Customers will also raise their demand as a result of product price reduction (WhatisEconomics 2).
Additionally, price ceilings introduces products and services sales discrimination .Sellers result to offering the services and products to the utmost binders within the black market. An additional effect is that suppliers will tend to offer low quality products and services to continue making the previous profit margins. The manufacturers can choose to reduce the production quantity, or decrease the ingredients’ quality in production. The only exemption concerns the oligopoly market where opposing companies may raise the product quality without raising their prices (Montreal Economic Institute 3).
Price ceiling may persuade black
markets to flourish in the market. Scarcity in the free market propels consumers
to search for products in the black market although they may be exceedingly
priced. The consequence of black market thriving leads to governments losing in
revenues previously received through taxation. Products traded within the black
market are usually unregistered therefore; no records are accessible for tax
Montreal Economic Institute. “THE PERNICIOUS EFFECTS OF PRICE CONTROLS.” IEDM. N.p., 2006. Web. 28 Aug. 2014. <http://www.iedm.org/files/avr06_en.pdf>.
WhatisEconomics. “How price ceiling affects market outcomes.” What is Economics?. N.p., 2014. Web. 28 Aug. 2014. <http://www.whatiseconomics.org/macroeconomics/how-price-ceiling-affects-market-outcomes>.
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