Question

Search the web to find one real-life example of a situation where a government has/had imposed price floor/ceiling. Write your analysis on the outcome of this policy.

Answer 1

When the price of a product is too high than the market equilibrium price which goes beyond the affordability of general people, government steps in and sets the maximum price limit for the product that could be charged by the producers, it is called price ceiling.

A real life example of price ceiling imposed by government can be traced back to the regulation enacted by the Indian government on the Uber's surge pricing during the peak hours. India is the second largest market for Uber to carry out its business with its largest numbers of population. But as it charges very high amount of money when the demand rises and during the peak hours, Indian government recently legislated the maximum price limit that could be charged by Uber in major cities. Setting price ceiling resulted into the increased demand for the Uber's ride services creating supply and demand problem. Imposing price ceiling by the government has though relieved commuters from paying higher amount during the peak hours, but it has more negative results. As the demand goes up for Uber rides, there is genuine shortages of supply due to misallocation of time, money, human capital and human potential. There will be limited numbers of availability of cabs compared to the higher demands which in turn will increase the commuters' waiting time. Average wait time for Uber rides also are increasing for those who are willing to pay the surge pricing along with the other general commuters. A complete deadweight loss occurs to the economy due to excess burden on the company and inequlibrium in the market. As surge pricing was a incentives for the drivers to come and work during the peak hours, there were more availability of Uber rides. The opportunity costs of drivers during the peak hours are very less after the price ceiling which make them less interested to come out and work during the peak hours making the needy also to go for other alternatives. Hence again there will be deadweight loss with the decreasing consumers causing surplus in the market making the whole function economically inefficient.