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]
They wanted to make rice more affordable for the population, as rice is a basic necessity for low-
income households
(ii) Calculate the excess demand for rice in Venezuela. [2]
13 million people
(iii) Calculate the consumer surplus for rice in Venezuela. [2]
(7.20-2.15)(9) + (7.79-7.20)(9)(0.5) = 45.45 + 2.655 = B48.11million
(iv) Calculate the producer surplus for rice in Venezuela. [2]
B7.16m
(v) Explain how the maximum price for rice in Venezuela changes the rationing function of
price. [4]
Because of the price ceiling, there's now a shortage of rice and an excess demand for it. This
means that non-price rationing methods have to be used. A non-price rationing method is a way
to distribute a good or service that doesn't involve the modification of price. In this scenario, the
non-price rationing method used was queueing, meaning that thousands of people had to queue
in order to get their ration of rice.
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]
c. Evaluate the effectiveness of a maximum price (price ceiling) as a way of making a
good more affordable to low-income households. [15]