PRICE CEILING

Price Ceiling of the Economy of Spain

Table of Contents

Introduction3

Concept of Price Ceiling3

Advantages and Disadvantages of Price Ceiling4

Advantages4

Disadvantages5

Problems5

Search Cost5

Black Market5

Is it fair?6

Solution to the problems6

Conclusion7

Price Ceiling of the Economy of Spain

Introduction

The Ministry of Industries of Spain has come up with a proposal to reform the regulations in the power sector. It is doing so in order to be able to set price ceiling and price floors so that the industrial sector can benefit. This proposal, if implemented, will allow the government to decide which type of energy is sold to which industry.

This proposal is being opposed by the power sector which is demanding the government to reject this proposal so that they may survive the tough times. The price ceiling of electricity in Spain is currently 180.3 Euros per megawatt/hour. If the proposal is accepted, prices could fluctuate beyond the ceiling. One reason why this reform is being implemented is that some industries are facing very high costs due to the high rates of power (www.eleconomista.com).

Concept of Price Ceiling

Price ceiling is a condition where the government puts a restriction on the maximum price at which a product can be sold. The market equilibrium determines the price ceiling. It is always set below the market equilibrium in order to have an effect. When the equilibrium is above the ceiling prices tend to go higher but the ceiling prevents it from getting out of control. The lower price will decrease supply while increasing demand. This causes issues in the natural economic conditions and a situation where the equilibrium can never be met unless people reduce their purchases to meet the demand. Another negative point of this concept is that ceilings reduce the supply hence, fewer labours are required. This is a major drawback of this condition if implemented.

In this graph the supply curve before the price ceiling is represented by 'S' and the supply curve after the price ceiling is imposed is represented by 'shortage'. It can be concluded from this graph that whenever a price ceiling is imposed, the supply curve shifts outward.

Advantages and Disadvantages of Price Ceiling

There are a lot of advantages and disadvantages of price ceiling depending on the people being considered. For example, price ceilings on electricity prices will benefit the consumers while it will be harmful to power producing industries.

Advantages

Price ceilings prevent suppliers from charging higher prices for the products. Cartels are also prevented in these cases as the price of the product will always be below the equilibrium price. The second advantage is that the inflation level is kept low. This also improves the living standards of the people. During periods of high inflation, the price levels increase faster than the income. This causes inconvenience to the public; hence, price ceilings are very helpful for consumers.

Disadvantages

Price ceilings reduce the prices of goods below the equilibrium. This discourages producers from increasing their production causing a shortage in the market. This is harmful for the entire economy as people will lose their ...