Which of the following statements about the effects of a government setting maximum prices (price ceilings) is true?

• A. A price ceiling set below the equilibrium price can lead to shortages in the market.
• B. Price ceilings eliminate the possibility of black markets.
• C. A price ceiling set below the equilibrium price will always result in a surplus.
• D. Price ceilings above the equilibrium price have a significant impact on market outcomes.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a price ceiling is — it is a legally imposed maximum price that sellers can charge for a good or service.
2. Step 2: Recall that the equilibrium price is where the quantity demanded equals the quantity supplied in a free market without intervention.
3. Step 3: Analyze the effect of a price ceiling set below the equilibrium price: since the price is artificially kept lower, quantity demanded increases while quantity supplied decreases, leading to a shortage.
4. Step 4: Consider the case of a price ceiling set above the equilibrium price: since the market price is already lower than the ceiling, the ceiling does not constrain the market, so it has no significant effect.
5. Step 5: Understand that price ceilings do not eliminate black markets; in fact, shortages caused by low ceilings can encourage black market activity where goods are sold at higher prices.