11ECO IB 2022 – Price Ceiling Worksheet

The planned economies of Eastern Europe used maximum prices across the markets for
many goods up until the late 1980s when, one by one, they transitioned to market based
economies. Hugo Chavez’ government in Venezuela, however, brought in maximum prices
on many necessity goods in 2003 to try and support poorer households in the country.
These included price ceilings on cooking oil, white rice, sugar, coffee, flour, margarine, pasta
and cheese. These controls were extended to other goods over the years.

The price controls went down badly with many businesses, especially when they are set
below the costs of production. A maximum price of 2.15 Bolivars was placed on a kilo of rice
when the cost of producing a kilo of rice was 4.41 Bolivars. Queueing became a daily part of
life for Venezuela’s consumers, who would spend long periods waiting in line for their daily
shopping.
In 2013 there were incredible scenes when the army was called in by the state to manage an
electrical store the government believed were selling goods such as washing machines and
televisions at prices that were too high. Some of the managers were arrested for breaking
the maximum price regulations.

a. The diagram shows the impact of a maximum price (price ceiling) on the price of rice in
Venezuela.
(i) Outline a reason why the Venezuelan government might have used a maximum price on
rice. [2]
Rice is a necessity good that important to sustain the diet of low-income households in
Venezuela.

(ii) Calculate the excess demand for rice in Venezuela. [2]

22 million kgs - 9 million kgs  = 13 million kgs

(iii) Calculate the consumer surplus for rice in Venezuela. [2]

(B7.20 - B2.15 x 9 million kgs) + (B7.79 - B7.20 x 9 million kg / 2) = B45.45 million + B2.66
million = B48.11 million

(iv) Calculate the producer surplus for rice in Venezuela. [2]

B2.15 - B0.56 x 9 million / 2 = B7.16

(v) Explain how the maximum price for rice in Venezuela changes the rationing function of
price. [4]

The rationing function of price means that at the equilibrium price in the market for rice in
Venezuela where demand equals supply every buyer who has effective demand for rice can buy
the good and every producer who has an effective supply of rice can sell the good. When the
maximum price on rice is introduced price can no longer ration the good because quantity
demanded is greater than quantity supplied and the price cannot rise to allow the market to clear.

b. Explain the effects on consumers, producers, and the government of a maximum price
(price ceiling) introduced in the market for a good. [10 marks]
 Answers should include:
 Definitions of maximum price and market.
 Diagram to show the impact of a maximum
price on a market and the effect this has on
consumers and producers. The diagram
shows the consumer surplus (yellow area)
and producer surplus (green area) after a
maximum price is used in the market for a
good.
 Explanation that a maximum price reduces
the price of a good to consumers and leads to
an increase in the consumer surplus of the
consumers who are still able to buy the good
with a maximum price.
 Explanation that a maximum price can cause
excess demand in the market for a good which leads to shortages and other methods of
rationing such as queueing which has an adverse effect on the consumer.
 Explanation that a maximum price reduces the producer surplus of firms that supply the
market, and this can lead to business failure and unemployment.
 Explanation that a maximum price will need to be enforced by the government which
leads to bureaucracy and increased costs. There could also be a policing cost if a parallel
market develops.
 Example of where a maximum price has been imposed on a market such as price
controls in the food market in Venezuela.

c. Evaluate the effectiveness of a maximum price (price ceiling) as a way of making a

good more affordable to low-income households. [15]
Answers should include:

 Definition of maximum price.

 Diagram to show the impact of a
maximum price of a good or service. In
this case, rented housing.
 Explanation that a maximum price on
rented housing in New York reduces the
price of rented housing for low-income
households and that this is important
because housing is a necessity good.
 Example of rented housing - in this case
in New York.

Evaluation/synthesis might include coverage of the problems of using a maximum price such as
shortages in the market, failure of the rationing function of price, development of a parallel
market and corruption, the cost to the government of enforcing the policy, decline in the quality of
rented properties and reduced long-term investment in the housing market.