ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Rent control is an example of a price ceiling, a maximum allowable price. With a price ceiling, the government forbids a price above the maximum.

Detailed explanation-2: -A price ceiling, such as a rent ceiling, results in a shortage if the ceiling price is less than the equilibrium price. Which of the following is a typical effect of a price ceiling set below the equilibrium price? Less of the good is produced with the ceiling than would be produced without the ceiling.

Detailed explanation-3: -The ceiling price is binding and causes the equilibrium quantity to change – quantity demanded increases while quantity supplied decreases. It causes a quantity shortage of the amount Qd – Qs. In addition, a deadweight loss is created from the price ceiling.

Detailed explanation-4: -The government-imposed lower limit on the price that may be charged for a particular good or service is called price floor. For certain goods and services, fall in price below a particular level is not desirable and hence the government sets floors or minimum prices for these goods and services.

Detailed explanation-5: -Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity.