Price Ceiling had been imposed by the government on
the price of sugar, particularly on coarse and fine granulated refined sugar
(CIMB, 2013). It is defined as the maximum price a seller can charge for a
product and it makes it illegal to set higher than that. To apply to Central Sugars Refinery, price ceiling is set below the equilibrium price to help consumers to
purchase sugars that they could not afford at the equilibrium price (Parkins,
2014).
During festive season such as Hari Raya, to keep the sugar price down, Malaysian government
imposes a price ceiling of RM2.50 (CIMB, 2013). Based on Diagram 3(a), the
price ceiling of RM2.50 results in an inefficient underproduction of sugar. The
Marginal Social Benefit (MSB) exceeds the Marginal Social Cost (MSC), which
means consumers are willing and able to buy more than the amount that Central Sugars Refinery is
able and willing to produce. Price ceiling then leads to shortages as it is no
longer in equilibrium. From Diagram 3(a), it is illustrated that the Quantity
Demanded for sugar, QD is higher than Quantity Supplied, QS. According to the
Law of Supply, when the price decrease, Quantity Supplied will decrease, moving
away from equilibrium and downwards along the supply curve. On the other hand,
based on Law of Demand, when the price decreases, Quantity Demanded will
increase, moving away from equilibrium and downwards along the demand curve
(Sloman, Wride, Garratt, 2012). This then creates a gap between QD and QS, which is the shortages of sugar.
Looking back at Diagram 3(a), before price ceiling is imposed, consumer
surplus consist of the area ABC and producer surplus is the area of DEF. After
price ceiling is imposed, consumer surplus can be seen as the trapezium ABD as
the price of sugar decrease. However, consumer surplus shrink to area A only
because B and D might be the potential loss of purchasing sugar. To illustrate,
price ceiling for sugar is imposed during festive season and it creates shortage
where sugar is fast-selling, so consumers will have to spend time and maybe
incur some cost to buy sugar. Producer surplus shrinks to area F and a
deadweight loss occur as a result of price ceiling.
To conclude, price ceiling is enforced by the government to prevent suppliers from setting a price outrageously high simply because they can. It serves as a method that is beneficial to the consumers where they can keep their cost of living low. However, it has its downside, where it discourages suppliers to produce more. Since the the price is regulated, to earn enough profit, suppliers will have to reduce their total cost which can affect the quality of the product. Furthermore, it creates a potential loss for both parties and results in a social loss, which is the deadweight loss.
To conclude, price ceiling is enforced by the government to prevent suppliers from setting a price outrageously high simply because they can. It serves as a method that is beneficial to the consumers where they can keep their cost of living low. However, it has its downside, where it discourages suppliers to produce more. Since the the price is regulated, to earn enough profit, suppliers will have to reduce their total cost which can affect the quality of the product. Furthermore, it creates a potential loss for both parties and results in a social loss, which is the deadweight loss.
No comments:
Post a Comment