Explain two reasons why a government might set a price ceiling (maximum price) on a good.

Using real-world examples, discuss the consequences of a price ceiling on stakeholders.

Answers may include:
• Definition: price ceiling (maximum price).
• Explanation: of the government’s motives for introducing a price ceiling, such as equity and accessibility.
• Diagram: showing price ceiling (maximum price).

Answers may include:

• Definition: price ceiling, stakeholders.
• Explanation: impact of a price ceiling on stakeholders:

• Consumers: shortages, lower prices, parallel/unofficial markets and the possible means to resolve a shortage (queues), possible reduced quality of goods, benefits such as access for low income families especially during inflation, equity.
• Producers: discouragement of suppliers to produce more because they cannot set prices and consequent reduction of availability, impact on signalling and incentive functions of price.
• Government: need for intervention to overcome shortages (rationing).

• Diagram: to show price ceiling (if not given in part (a)).
• Synthesis (discuss): a considered and balanced review that includes a range of consequences for different stakeholders.
• Examples should include real-world illustrations such as rents, fuel, food and their consequences.

N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.