Why do shortages develop under a binding price ceiling?
A) It encourages sellers to produce more of the product.
B) It encourages buyers to purchase less of the product.
C) It makes the price so low that the quantity demanded exceeds the quantity supplied in the legal market.
D) It makes the price so low that the quantity demanded exceeds the quantity supplied on the black market.
E) It encourages sellers to increase the quality of the products they sell,which in turn increases the quantity demanded.

Question

Quizplus · Accepted Answer

A binding price ceiling is a government-imposed maximum price below the market equilibrium price. This policy reduces the price of the product, but it also creates excess demand, as the quantity demanded exceeds the quantity supplied at the lower price. As a result, shortages develop, as some buyers cannot find the product they want to buy at the lower price. While A, B, D, and E are possible effects of a price ceiling, in the case of a binding price ceiling, the quantity supplied does not increase, and the quality of the product is not likely to improve, as the sellers face a lower price and lower profits.

Why Do Shortages Develop Under a Binding Price Ceiling