A price ceiling or limit refers to a restriction on the quantity that can be demanded as payment, for a certain commodity or service. In most instances, a price limit is enforced by a nation’s administration in a bid to sort out one or a number of issues touching on the general financial system, and it may at the same time, be used to look after the interests of consumers in general.
On the other hand, it is not odd for a number of industries to enforce a price control as a way of propping up the more advancement of that trade (Melanie, 2008). The use of price control for the latter purpose in most times has a lot to do with the association linking the supply and demand for the commodity or service. In order that a price limit comes out as effective, it has to be different from the free market price.
Whenever a price limit is enforced by an administration with a certain objective, a commodity or service that is well thought-out to be important is normally involved. For instance, an administration may enforce a restriction on charges that power firms can demand from clients for every unit of energy consumed.
The initiative is to look after the interests of customers through ensuring that dealers do not charge rates that are expected to make it unattainable for customers to come up with the money for something considered necessary for the basic standard of living. In the US, it is not odd for government-level entities to keep an eye on, and enforce price limits on utility expenses.
The enforcement of a price limit can be of assistance in the evening out a given market, and have a favorable effect on the economy. The approach mostly inspires traders who were charging very high prices for their commodities and/or services to either trim down on production or probably ditch the market altogether. This ends up in suppliers who are at a position to put forward commodities and/or services of up to standard quality at a cost that a customer can actually afford.
Again, the capacity to buy commodities and/or services at sound prices motivates customers to do so. Such consumers, as well, are left with more resources to use up on other purchases, which subsequently raise demand in a number of markets and has the result of fueling the economy. Price ceilings are not beneficial as will be discussed in this article. They are beneficial just at the onset before negative effects set in.
At times, cases of a restriction on how low a price can be demanded for a commodity or service that is seen to be essential occur (Hugh, 2008). This is referred to as a low price limit or ceiling. Such restrictions are aimed at preventing the emergence of a control or within a given industry, an occurrence that would undercut the capacity of a number of firms to be viable.
Should a price ceiling be imposed on gasoline prices in the US market?
Price ceilings should not be enforced on gasoline prices in the United States market. There are a good number of reasons for this, and they are going to be highlighted here. To begin with, gasoline firms sell their fuel at prices determined majorly by the global costs of the commodity. They are in business, and their major aim is to make profits just like any other business people.
These firms import the commodity and have to adjust their selling prices to make reasonable gains. When the prices at which they buy the gasoline go up, they as well have to raise the prices at which they sell to their consumers (Alston, Kearl & Vaughan, 1992, p. 203). In a scenario where they are operating in a market with a price ceiling, it means they cannot adjust their prices upward even though they have imported the commodity at elevated costs.
The future of doing business in such a case then turns out to be bleak, and it will be a matter of time before such traders close shop. With private dealers out of business then the next step will be government nationalization of the same industry, something that in the end will be borne by ordinary citizens.
If events from the past as far as gasoline price ceilings are concerned in the United States are anything to go by, then the same should not be allowed to take place. At the time when the US administration put in place upper limit prices for gasoline in 1973 and 1979, traders put up for sale the commodity on a first-come-first-served basis.
Motorists had to remain in long queues to purchase gasoline. The proper cost of gasoline, which entailed both the money shelled out and the time used up hanging around in the queue, was in most times higher than it would have been if the cost had not been limited. In 1979, for instance, the US set the cost of gasoline at around $1 for every gallon. Assuming the market price had stood at $1.3, a motorist who purchased 10 gallons would have put aside $ 0.3 for every gallon.
However, if he or she had to be held up in a queue for half an hour to purchase gasoline, and if their time was worth $7 for every hour, the actual cost to him or would be more or less $10 for the commodity, and $5 for the time. This implies that the total expense would be $1.5 for each gallon (Hugh, 2008). A quantity of the commodity, as might be expected, was held for acquaintances, loyal clients, the politically well connected, and those who were ready to give a little amount on the side.
Globally, the general trend as far as gasoline costs are concerned is one that is going up. Experts say that the commodity is getting scarcer with an increasing demand. This form of energy is not renewable, and the sooner its consumers realize this fact the better.
If the dynamics of the market demand that prices go up, there needs to be no restriction as this will serve as a wakeup call for the coming up with affordable and renewable energy sources. When such energy sources come up it will be a plus for the environment, which is choking from gasoline combustion products.
Price ceilings over gasoline pose a problem in the trade-off involving the requirement to have an uncomplicated plan normally looked at as reasonable and the requirement for adequate flexibility to uphold effectiveness.
Coming up with an outward show of evenhandedness calls for maintaining a host of prices stable, but effectiveness calls for effecting recurrent changes (Melanie, 2008). Alterations of comparative prices, on the other hand, subject the official procedure governing controls to an onslaught of lobbying and objections of injustice.
As it has been mentioned earlier, gasoline prices standings are majorly determined by dynamics in the global market and importers of the commodity have to adjust to these dynamics. The United States market system is at a very advanced stage, being one of the leading economic powerhouses in the world. In as much as there have to be regulations in the market set up and more especially on essential commodities like gasoline, a limit should not be set on these commodities as it will bear a negative impact on this economy eventually.
The universal economic position as far as price ceilings are concerned is that price ceilings price ceilings should not be used for a long period. This therefore, implies that short-lived use of price ceilings in times of elevated inflation is justified. The use of these economic interventions for a long period poses problems that have been mentioned earlier.
Price ceilings on essential commodities like gasoline do not have any good outcome after being analyzed well. They normally come out like an excellent idea at the onset. However, the very act of limitation alters the manner the market functions, and ends up causing unplanned outcomes such as scarcities. The scarcities then have a tendency to reward speculation in the place of actual investment and advancement.
Gasoline is costly because we cannot go on with our lives without it. We therefore, have to purchase it regardless of its price. Actual answers for transport and development are not as effortless as saying gasoline needs to be affordable all the time.
Alston, R. M., Kearl, J. R., and Vaughan, M, B. (1992). Is There a Consensus Among Economists in the 1990’s? American Economic Review 82 (1992): 203–209.
Hugh, R. (2008). Price Controls. Retrieved November 28, 2011, from http://www.econlib.org/library/Enc/PriceControls.html
Melanie H. (2008). Advantages & Disadvantages of a Price Ceiling. Retrieved November 28, 2011, from http://smallbusiness.chron.com/advantages- disadvantages-price-ceiling-25210.html