Question

Discuss how price controls affect a competitive market. Be sure to refer to the demand and supply model when discussing efficiency. Also discuss how equity and efficiency relate to the markets.( No plagiarism)

Answer 1

A competitive market is considered as the most efficient market system. Here, price and quantity are decided by the demand and supply forces. The government does not interfere in the free-market system.

But when the government seeks to impose price control, it would cause inefficiencies in the market. The government sets the price ceiling or floor pricing.

There would be distortion if the price ceiling occurs below the equilibrium price. it would create a shortage of goods in the market.

on the other hand, the Floor price is effective when it is above the equilibrium price level. it would create a surplus of goods in market.

Equity and efficiency are two contradictory objectives. The government virtually makes interference in the market to create an equitable society. Efficiency does not mean that the equity objective has been achieved. Efficiency ensures the maximum output but does not ensure equity in the distribution of output. Government seeks to ensure the equitable distribution of output.