Price Ceiling Monopoly

Price controls come in two flavors.

Price ceiling monopoly. Therefore here the price control would compel the monopolist to take up the competitive solution p q as his profit maximising point. Price ceilings suppose a price ceiling is imposed. Therefore if the price ceiling is imposed at p c p the monopolist s mr mc point would be the point a which is of course the competitive solution.

Laws that government enact to regulate prices are called price controls. This is there fore known as marginal cost pricing. In contrast a sales tax will reduce quantity traded even in a monopoly market.

How does this affect the monopolist s revenue curves. This is shown in the diagram above. This section uses the demand and supply framework to analyze price ceilings.

If a price ceiling on a monopoly is set low enough a shortage in the market will result. In a monopoly market it is possible for a price ceiling to increase the quantity traded. First since social welfare is maximum when price of a commodity is fixed at the level where it equals marginal cost of production of the commodity it is proposed that the maximum price for the monopoly should be fixed equal to the marginal cost.

Such conditions can occur during periods of high inflation in the event of an investment bubble or in the event of monopoly ownership of a product all of which can cause problems if imposed for a long period without controlled ratio. A price ceiling keeps a price from rising above a certain level the ceiling while a price floor keeps a price from falling below a given level the floor. More specifically a price ceiling in other words a maximum price is put into effect when the government believes the price is too high and sets a maximum price that producers can charge.

A price ceiling is a government or group imposed price control or limit on how high a price is charged for a product commodity or service. Then if it sells less than is demanded at p 0 it must do so at the price p 0 rather than at a higher price and so its marginal revenue is p 0. This price must lie below the equilibrium price in order for the price ceiling to have an effect.