Can You Explain The Concept Of Price Ceiling?


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Tariq Habib Profile
Tariq Habib answered
An example of government interference comes when the government legislates a maximum price ceiling. This occurred in the United States in the 1970s, and the results were sobering. We should do our analysis of the gasoline market to see how price ceilings function.  Let's set the scene. Suppose there is suddenly a crisis in the oil industry. This has happened time and again because of political disturbances in the Middle East due to war and revolution.  Politicians seeing the sudden jump in prices, rise to denounce the situation. They claim that consumers are being "gouged" by profiteering oil companies. They worry that the rising prices threaten to ignite an inflationary spiral in the cost of living. They fret about the impact of rising prices on the poor and elderly. They call the government to do something. In the face of rising prices, the U.S government might be inclined to listen to these arguments and place a ceiling on oil prices, as it did from 1973 to 1981.  What are the effects of that? Suppose the initial price of gasoline is $1 a gallon. Then. Because of drastic cut in oil supply, the market price of gasoline rises to $2 a gallon. Now consider the gasoline market after the supply shock.

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