Question

1.1 With aid of diagrams and suitable examples discuss the economic effects of price controls.
1.2 With the aid of relevant examples distinguish between administered prices and price controls.

Answer 1

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1.

Price controls are government regulated prices which are set over or under the free market prices in order to increase social welfare. This is done in order to regulate the markets and not let producers or sellers charge anything beyond the regulated price.

There are two types of price controls: price ceiling and price floor

Price ceiling is the maximum price that can be charged for a good and it is set below the market equilibrium price level.

E g. Rent controls. Since the regulated price is lower than free market price, quantity demanded at that price exceeds quantity supplied, thereby leading to shortage in the economy.

Price floor is the opposite of price ceiling. It is the minimum price which needs to be charged for a particular good or service.

Eg minimum support prices. These prices are set over and above the free market prices and thus at these prices quantity supplied exceeds quantity demanded, leading to a surplus situation in the market.