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Limited Supply/Price & Its Effects

Describe a scenario where either the supply or price of a good or service is intentionally limited by the government. Explain the effect of this policy on both the suppliers and consumers of the good or service.

Who benefits the most from the restriction and why?

Solution Preview

When a government interferes with the prices of commodities such as establishing a price ceiling, the purpose is to help the consumers because the government thinks that the equilibrium price is too high for them. An example is when the U.S. government has controlled the oil prices. This happened in 1970s when they announced that firms could not charge more than $5.25 a barrel of crude oil. At that time, the vendors were selling $10 per barrel which was too high.
Controlling prices of goods regulates and stabilizes the prices. Setting prices creates opportunity to have upper benchmark against the others in the competition. Uniform pricing allows organizations to get more market share because they can offer prices that can be lower than the price ceilings. Sometimes policymakers are hesitant to ...

Solution Summary

The solution describes a scenario where the prices of commodities are intentionally limited by the government. It also discuses the effects of this policy on both the suppliers and consumers. References are included.