3a. Explain the concepts of maximum and minimum price controls.
Maximum price control most known as a price ceiling, is used in effect so that the good /service is affordable for poorer citizens. The government sets price ceilings on goods and services that has potential of being highly priced. By placing an price ceiling, the good/service cannot be supplied at a any higher price. An example will be rice, inorder to avoid starvation for the citizens who live in poverty, a country could set price ceiling for the rice sold. Although price ceiling may maintain low prices, it can cause shortages and rationing.
Minimum price control most known as price flooring, is used in effect so that the good/service’s price wouldn’t fall under a set value. The government sets price flooring on goods and services that has importance or necessity for the country. By placing an price flooring, the good/service cannot be supplied at a any lower price. For example, Japan is currently in a situation in which not many of the young generation doesn’t plan to be farmers. Inorder to make sure that there will be farmers in the future, Japan can set a price flooring for rice and lead that to be an incentive for the young ones.
3b. Evaluate the idea that government intervention in the form of price ceilings and price floors is well intentioned, but often leads to undesirable side effects.
One of the major threats price ceiling has is shortages. Since the good/service will be available for all citizens at any level, an shortage will occur for the item. The supply wouldn’t be able to catch up for the demand, thus not allowing people to be able to access to the good.
Lets take post war Japan as an example. Japan put an price ceiling on rice so that citizens who lived in poverty wouldn’t starve. This caused shortage for rice, which was soon solved by the installation of rationing (second threat). Rationing in this situation lead to an conclusion that the rice will be allocated equally amongst the Japanese citizens. However the rice allocated to each citizen was so small that they were still in starvation. The wealthy class was strongly against the price ceiling, ending up buying the rice off of other citizens. This lead to the settlement of an black market (third threat). In this black market, illegally imported rice was sold at an outlying price.
Price flooring can lead to inefficiency within the market. It reduces the market size because the number of affordable customers diminish. Due to the increase in income, the supply of the market will increase also. This can overcome demand, thus causing allocative inefficiency within the market.
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