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

Answer Details

(a) Four objectives of a price control policy:

• To protect consumers. A maximum price prevents sellers from charging excessive prices for essential goods, so that low-income people can afford them.
• To protect producers. A minimum price (price floor) guarantees producers, such as farmers, a fair return and protects them from ruinously low prices.
• To check inflation. Fixing prices of key goods helps to hold down the general price level during periods of rising prices.
• To ensure availability and fair distribution of essential goods. Price control aims to keep necessities within reach and to prevent hoarding and profiteering.

(b) Four effects of a maximum price control policy. A maximum (ceiling) price fixed below the equilibrium price makes quantity demanded exceed quantity supplied, and this produces:

• Shortage (excess demand). At the low fixed price consumers want more than producers are willing to supply, so goods become scarce.
• Emergence of a black market. Because of the shortage, some goods are sold secretly above the legal price.
• Hoarding and rationing. Sellers hoard scarce goods, and the government or sellers must ration the limited supply, often causing long queues.
• Fall in quality and smuggling. Producers may cut quality or divert goods to areas or countries where they can be sold at higher prices.

Examination takeaway: remember that a maximum price only "bites" when it is set below equilibrium, which is exactly why it causes shortages, black markets and hoarding.