Question

Answer the following question.
Explain the meaning and implications of the maximum price ceiling and minimum price ceiling.

Answer 1

The maximum Price ceiling is the legislated or government-imposed maximum level of price that can be charged by the seller. Usually, the government fixes this maximum price much below the equilibrium price, in order to preserve the welfare of the poorer and vulnerable section of the society. For example, the Government of India imposes price ceiling in the market of wheat, rice, sugar, and other necessary goods.

The following are the implications of the maximum price ceiling.

1. Excess demand- Due to artificially lowering the price, the demand becomes comparatively higher than the supply. This leads to the emergence of the problem of excess demand.
2. Enhances Welfare- The imposition of the price ceiling ensures access of the necessary goods within the reach of the poor people. This safeguards and enhances the welfare of the poor and vulnerable sections of society. 
3. Fixed Quota- Each consumer gets a fixed quantity of goods (as per the quota). The quantity often falls short of meeting the individual’s requirements. This further leads to the problem of shortage and the consumer remains unsatisfied.
4. Inferior Goods- Often it has been found that the goods that are available at the ration shops are usually inferior goods and are adulterated and infiltrated.
5. Black Marketing- The needs of a consumer remain unfulfilled as per the quota laid by the government. Consequently, some of the unsatisfied consumers get ready to pay higher prices for the additional quantity. This leads to a black-marketing and artificial shortage in the market.

On the contrary to the concept of the price ceiling, minimum price ceiling or price floor implies legislated or government fixed minimum price that should be charged by the seller. The minimum price is fixed above the equilibrium price. For example, in India, the minimum wage is fixed to safeguard the welfare of laborers, and minimum support price is fixed to safeguard and protect the interests of the farmers by ensuring minimum returns to them.

The following are the implications of minimum price ceiling:

1. Assurance to the Farmers- The imposition of the price floor assures the farmers that whatever they produce will get sold in the market. This implies that the farmers can produce to their maximum.
2. Assurance of Returns- Due to the price floor, the farmers need not to bother about the sale of their output. This ensures a minimum guaranteed return to their investment in the production process. 
3. Higher Income- The minimum guaranteed returns in the form of a minimum price and minimum wage to laborers result in an increase in the income of the poor people.  
4. Burden on Consumers- Price floor exerts additional pressure on the consumers and the traders, as they need to buy the products at a comparatively higher price instead of the equilibrium price. 
5. Burden on Government- It also puts an extra burden on government revenues. It becomes mandatory for the government to purchase the excess produce, even if it runs a sufficient volume of buffer stocks. 
6. Higher Taxes- The government tries to shift the burden (associated with purchasing the excess produce at a higher price) to the consumers and the traders in the form of higher taxes.