ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -As illustrated above, an ineffective (price) ceiling is created when the ceiling price is above the equilibrium price. Since the ceiling price is above the equilibrium price, natural equilibrium still holds, no quantity shortages are created, and no deadweight loss is created.

Detailed explanation-2: -A price ceiling above the competitive equilibrium price will result in a surplus. A price ceiling below the competitive equilibrium price will result in a shortage.

Detailed explanation-3: -Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.

Detailed explanation-4: -Price ceilings that involve a maximum price below the market price create five important effects: Shortages, Reduction in Product Quality, Wasteful Lines and Other Search Costs, Loss of Gains from Trade & Misallocation of Resources.

Detailed explanation-5: -A pricing ceiling is nothing more than a legal limit. The term “equilibrium” refers to the state of affairs in the economy. People may or may not follow the price ceiling, thus the actual price may be at or above it, but the price ceiling has no effect on the equilibrium price.