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Explain ‘black ma
A price ceiling is the maximum acceptable price determined by the government on various commodities. It is the upper limit beyond which the prices e not allowed to rise for certain essential commodities like rice, wheat, kerosene etc. it is mainly done to protect the interests of the consumers. Generally, the price is fixed below the market determined the equilibrium price.
The market is in equilibrium at point E where the market demand and market supply curve intersect with each other. The equilibrium price is P1 and the quantity is Q1 respectively. The government introduces a price ceiling at the price level P which is lower than the equilibrium price level. The consumers demand Q units of the commodity. But the market supply is only Q* units. This creates a situation of excess demand in the market corresponding to the price where the quantity demanded is higher than the total market supply. Thus, even though, the government was trying to control the rising prices, it would result in the future shortage of commodities. Thus, the number of commodities sold to the people would be limited. Also, since the whole process is controlled by the government, the sales would be carried out through government authorised shops. This shortage can have two main implications resulting in the emergence of black markets.
Each consumer would be given only certain pre-determined units of the commodities through government authorised shops. The total consumption would be fixed in the market even though some may be ready to pay a higher price to get more units. Thus, this can cause dissatisfaction among consumers. All the consumers would not be satisfied with the quantity of the commodities that they receive. Some of them would be willing to pay a higher price for it. This will result in the formation of black markets and hoarding practices.
The price floor is the government imposed a limit on the minimum price that should be charged for a commodity. The government sets floors or minimum prices for the commodities and services whose prices cannot fall below a minimum prescribed limit. This government-imposed lower limit the price is called the price floor. This is more commonly found in agricultural price support programmes. To be effective it should be higher than the equilibrium price.
The market is at equilibrium at E where price is P1 and quantity is Q1. When the government imposes a price floor that is higher than the equilibrium price P2, the market demand is Q*. But at this price, the firms want to supply the quantity Q2. This creates an excess supply in the market to the quantity Q* Q2. When the market experiences the situation of excess supply, the price of the commodity falls below the equilibrium price. To prevent the price from falling because of the prevailing excess supply, the government will purchase this excess quantity at a pre-determined price.
Thus, when a price floor is imposed above the equilibrium price, the excess quantity will be automatically wiped out by the government to ensure a proper return to the producers. This is mainly done by procuring the food grains and storing them as buffer stock. The FCI was established by the government to procure food from the farmers by giving them the minimum support price and storing them as buffer stocks to ensure food security in the country. These grains are then scientifically stored in godowns. It will help in reducing the crisis during the shortage of food grains. The grains acquired and stored as buffer stock are distributed among the public through the Public Distribution System (PDS).
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