“Government-set prices undermine the rationing function of competitive prices.” Explain carefully in terms of both price ceilings and price floors
Please provide the best answer for the statement.
A ceiling price means that the government may hold prices at a level that is below the market equilibrium price. Since the market equilibrium is where the quantity demanded is equal to the quantity supplied, any price below that would find an excess quantity demanded over that supplied. In other words, a shortage would develop and the market would fail to ration (QD > QS). In unregulated competition, this situation could not persist because competition would drive up the price until the equilibrium quantity and price were reached.
A price floor means that the government may hold prices above the market equilibrium price by agreeing to pay that price for any unsold surplus. The rationing function of the competitive price system will not work because sellers will have no competitive pressure to lower prices to get rid of the surplus, if they can sell it to the government at the supported price there will be a persistent product surplus (QS > QD).
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