Task 3 Practice

Paper 1 Part B

Using real life examples, evaluate the advantages and disadvantages of a government
decision to impose a price ceiling on rental property within a city. [15 marks]

Price controls refer to minimum or maximum prices set by governments on prices that restrict them
from returning to their equilibrium level determined by supply and demand. These result in market
disequilibrium as the price mechanism (the manner in which price is determined by supply and
demand) is unable to function. A price ceiling refers to a legal maximum price on a good or service,
meaning that sellers are unable to charge above this price, which is set below equilibrium.

An example of price ceilings being applied in real life is with government intervention concerning
rent prices. If the government believes that rent prices, a necessity, have risen too high, it may
introduce a price ceiling on rent prices. This means that landlords cannot legally charge a higher
price than the price ceiling for tenants.

The above graph represents the impact of a price floor on the rental market. Price of rent decreases
from Pe to Pc, and quantity of units demanded