Read the passage carefully and answer the questions based on the passage:
Concept of Price Ceiling
It is not very uncommon to come across instances where the government fixes a maximum allowable price for certain goods. The government-imposed upper limit on the price of a good or service is called a price ceiling. A price ceiling is generally imposed on necessary items like wheat, rice, kerosene, sugar etc. The objective of the price ceiling is to restrict the price of a good so that it becomes affordable for consumers to buy. However, it does not always generate the desired results. Most of the time, intervention by the government in the form of a price ceiling leads to various socio-problems.
Imposition of price ceilings usually results into?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Excess demand for the good in the market.
When a price ceiling is imposed below the equilibrium price, the price of the good becomes artificially low.
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At this lower price, consumers demand more because the good is cheaper.
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But producers supply less because the price is not profitable.
This mismatch between high demand and low supply creates a shortage, also known as excess demand in the market.