Question

Which one of the following statements is NOT true in the context of the imposition of a price ceiling by the government on the market for kerosene.

• A. The imposition of price is below the equilibrium price of kerosene.
• B. The imposition of price is above the equilibrium price of kerosene.
• C. It may result in the creation of a black market due to non-satisfactory quantity in a fair-price shop for kerosene.
• D. It could end up creating excess demand of kerosene.

Hint:

Price Ceiling = Imposed BELOW equilibrium price (creates shortages/excess demand).
Price Floor = Imposed ABOVE equilibrium price (creates surpluses/excess supply).

Answer 1

The Correct Option is B

Concept:
A price ceiling is a legally established maximum permissible price that suppliers are allowed to charge for an essential commodity, such as kerosene or wheat.

Step 1: Mechanism of a Binding Price Ceiling:
To make essential goods affordable to low-income households, the government fixes the ceiling price strictly below the free-market equilibrium price.
Because the ceiling price is lower than the equilibrium price:
- Quantity demanded expands because the good is cheaper.
- Quantity supplied contracts because producers face lower returns.
- A persistent condition of excess demand (shortage) is created.
- Due to shortages at fair-price ration shops, consumers often turn to illegal secondary channels, leading to black marketing.

Step 2: Identifying the False Statement:
Statement (B) asserts that the price ceiling is set above the equilibrium price. If set above the equilibrium price, the ceiling would be non-binding and ineffective.
Therefore, statement (B) is NOT true.
Final Answer:
Statement (B) is false regarding price ceilings. Hence, option (B) is the correct answer.