(a) Outline any two objectives of a price control policy. (b) Highlight any three effects of a maximum price control policy.

Answer Details

(a) Two objectives of a price control policy. Price control is government intervention to fix the price of a good above or below the equilibrium market price.

• To protect consumers from exploitation by fixing a low maximum price for essential goods so that the poor can afford them.
• To check inflation by holding down the prices of key commodities.
• To ensure fair distribution of scarce essential goods and to protect producers/farmers (through a minimum price) from ruinously low prices.

(b) Three effects of a maximum price control policy. A maximum (ceiling) price is a legal price set below the equilibrium price.

• Excess demand (shortage): at the low fixed price, quantity demanded exceeds quantity supplied, so goods become scarce.
• Emergence of a black market: some sellers divert goods and sell secretly above the controlled price.
• Hoarding and rationing: traders hoard goods hoping to sell dearly, and government may have to introduce rationing to share the scarce supply.
• Fall in quality and reduced supply: producers may cut quality or output because the fixed price is unprofitable.

Examination reminder: a maximum price is only effective when set below equilibrium, and its typical outcome is shortage plus a black market.