Introduction
Tour Itinerary
Destinations
Small Farm 1
Small Farm 2
Commercial Farm
Non Trad' Farm
Issues
Theories
Pov'ty Indicators
Commodities
Poverty
Econ. of Scale(1)
Income Elasticity
Infant Industries
Commodity Mkts
Econ. of Scale(2)
Lorenz Curve
Malthus
Measuring Pov'ty
Perf. Competition
Cycle of Poverty
Price Ceilings
Prod. Subsidies
Coffee Mkt.
Living Standards
Worksheets
Resources

Home Field Trips Rural Life and Agriculture Tour Price Ceilings

Theories

Price Ceilings or Maximum Prices

Next theory - Producer Subsidies >>

Price ceilings occur when governments set a price above which producers are unable to sell the good. If the price ceiling is to have any effect then the control should be placed below the equilibrium market price. A price ceiling is shown in the diagram below.

The model suggest that setting the price ceiling at a price below the equilibrium market price will create excess demand i.e. a shortage equal to Q3 to Q2. The model above predicts that the artificially low price leads to an expansion along the demand curve and a contraction along the supply curve.

In reality many maize farmers considered the price too low to continue commercial production and considered switching to produce other commodities, known as goods in competitive supply.

In the case of price ceilings and the resulting shortages alternative allocative mechanisms will operate to alleviate the shortage. These might include:

• Allocation on a first come first served basis
• Allocation by sellers preference
• Allocation by government rationing

Often when shortages occur a black market may develop. This occurs where those consumers that have acquired the good sell it at an illegal price above the price ceiling.

In the case of Zambia where one of the purposes of the government policy was to ensure continued and increased supply of the basic foodstuff, clearly a price ceiling by itself would not produce the desired effect. The government had to look for alternative ways of expanding supply

Next theory - Producer Subsidies >>