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Markets: Price Mechanism and its Application (Government Intervention) -…

- - - - Reasons
        
        Affordability and fairness
        
        Allow some of the poor to buy a good that they otherwise would be unable to afford or prevent exploitation by suppliers who may charge a high price during such times of shortages
        
        Anti-inflationary policy
        
        Prevent continuous increase in prices of many products which could be detrimental to economic growth and people's standard of living.
      - Effects of Price Ceiling
        
        Firms deciding which customers should be allowed to buy, for example, by giving preference to regular customers
        
        Rationing through the issue of coupons which can alsobe administratively expensive
        
        The issue of fairness will be a problem as those who need it most may not be amongst the first in line. Even if they are, then there is the issue of time and resource wasted in queuing much earlier than necessary
        
        Emergence of black markets where goods are sold illegally at market prices above the legislated maximum market prices. This has implications on equity or fairness as the lower income household may not be able to afford the good, and the good is sold only to the rich who can afford to pay the black market price
        
        Allocation of good or service on a 'first-come, first-served' basis, which is likely to lead to queues developing, or firms adopting waiting lists. Consumers would thus also incur additional opportunity cost of extra time spent searching or waiting for the good or service
      - Conditions to be effective
        
        Legal market price has to be set below the free equilibrium price
      - Definition
        
        Maximum legal market price set and allowed by the government