Why price ceiling is not the best solution to protect poor consumers?

Question

Explain why you think the use of a price ceiling by a government may only make the situation worse.

Answer 1

Government-imposed price ceilings on consumer goods is only a good idea for necessities, and only during dire economic periods such as depressions or major recessions.

A price ceiling set below the free-market price has several effects. Suppliers find they can no longer charge what they had been charging for their products. As a result, some suppliers drop out of the market. This represents a reduction in the quantity supplied. Meanwhile, demanders find that they can now buy the same product at a lower price. As a result, market demand increases as new buyers enter the market and existing buyers consume more of the good.

As a result of these two actions, demand exceeds supply and a shortage ensues. The good must then be rationed by non-market means, such as waiting in line.

Price ceilings are often intended to protect consumers from certain conditions that could make necessities unattainable. But they can also cause problems if they are used for a prolonged period of time without controlled rationing. A good example is rent control in New York City (rent control is a price ceiling on rent). When soldiers were coming back from World War II and starting families (causing a large demand for apartments), but stopped receiving pay (there was no longer a war), many could not deal with the jumping rent. The government put in price controls, so the soldiers and their families were able to pay their rent and keep their homes. However, this increased the demand for apartments and lowered the supply, meaning that all available apartments were rapidly taken, until there were none left for any late-comers.

Answer 2

Price ceilings lead to excess demand. Since price is not able equate demand with supply, there is queueing. Many poor consumers will be forced to do without.

Also 'black markets' are also likely to form, enabling rich consumers to jump the queue. This will hurt the poor if it means there is less of the good or service left over for them.