Question

For several years in the late twentieth century, the government set the price of gasoline below the equilibrium price. This is an example of a _____.

Answer 1

""A price ceiling occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium.

Answer 2

This is an example of a price ceiling, what means price management.

In economics theory, price is given through the interaction between supply and demand for the good or service. In this way, the scarcity of a product in the face of high demand increases its price, as an abundance in the face of low demand, decreases the price. The equilibrium price occurs when the supply and demand for the good or service equals, leaving the economy at the optimum, with maximum efficiency.

However, in certain strategic markets, the government prefers to intervene, either through subsidies or a limit on prices. The case of gasoline at the end of the 20th century is an example of this. The government instituted a ceiling, an artificial limit to the price of gasoline, driving the market to work below the equilibrium price.

The reasons that make the government intervene are diverse, and may be ideological through more interventionist governments, but may also be momentarily necessary, such as in the case of supply shock, when production is affected drastically by a random event, such as the oil shock.