Question

A severe water shortage recently hit country X. The government wants to ensure that drinking water remains affordable to the public. What policy or steps should the government undertake?
A) Decrease spending on water reforms.

B) Introduce a price floor on drinking water.

C) Increase taxes for working individuals.

D) Introduce a price ceiling on drinking water.

E) Increase taxes for producers of drinking water.

Random answers will be reported!!

Answer 1

C) Increase taxed for working individuals

Answer 2

The correct answer is D.

If there is a sudden water shortage due to an unexpected phenomenon, the market equilibrium will be broken and, instead, there will be an excess of demand, as the amount that consumers are willing to purchase is larger than the amount offered/available. Therefore, the market will try to move towards a new equilibrium and prices will start to rise until the amount demanded and supplied are equal again.

Probably, if the water shortage is very severe, the new equilibrium price will be too high and many people will not be able to access an absolutely necessary good like water. Therefore, what the goverment can do is to establish a price ceiling (a maximum price located below the new equilibrium price), so that the money charged for water cannot exceed that specific amount and it remains affordable.