Question

A price ceiling means that:

Answer 1

Answer:

The most accurate answer in the list is:

government is imposing a legal price that is typically below the equilibrium price. (B.)

Explanation:

when you thing of Price ceiling, it would help to think of the literal ceiling in a house. The ceiling is the highest point anything inside the house can get to, nothing goes beyond the ceiling. Similarly in a market, the price ceiling is the highest possible legal price that a product or service can be sold for, and price ceilings are usually interventions of the government or certain companies (resale price maintenance) to protect consumers against excessive price increase as a result of inflation, or a monopolistic ownership of a product. Price ceiling is of advantage to regular consumers, because it ensures the affordability of these products, however, in the long run, price ceilings may be of disadvantage if the government sets unrealistic prices , especially to the economy, producers and the long-run consumers, because it can result to stock crashes, business failures and even economic crisis. Example of price ceiling can be seen in this scenario:

An imaginary town got featured in a popular magazine as a very good tourist destination spot, as a result more tourists visit the town, and as a result the hotel owners in the town increases the prices of hotel bookings from a Price (P1) to a price (P2), before the featuring of the post in the magazine, this increase in price would have caused a decrease in quantity of demand, but the demand kept increasing because more tourists were available to pay, then the locals contacted the law makers and they brought the price down back to its original rate, or even below that rate (equilibrium) and no hotel owner was allowed to charge above that price. This is Price ceiling, this is of advantage, but in the long run, there may not be hotels to be rented again for those who wish to rent , because demand still keeps rising, above supply, and people will be unwilling to build hotels since it is not a profitable venture, and the hotel owners might even go ahead to reduce the quality of their service, to make up for this reduction in price.

On the other hand, the opposite of price ceiling is Price flooring. Here the government sets a minimum maximum price for which a product or service can be sold, to protect the producers and the economy. An example here is in the setting of the minimum wage, which is the lowest amount a long term worker is to be paid in an economy, it is usually set above the poverty line. Also price flooring is implemented on agricultural products too, to encourage farming in an economy.