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14 Sep 2024, 22:10
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A price ceiling is a government or group-imposed price control or limit on how high a price can be charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions can occur during periods of high inflation, in the event of an investment bubble, or in the case of monopoly ownership of a product.
There is substantial research showing that under certain circumstances, price ceilings can, paradoxically, lead to higher prices. The leading explanation is that price ceilings can coordinate collusion among suppliers who would otherwise compete on price. More precisely, forming a cartel becomes profitable by enabling nominally competing firms to act like a monopoly, limiting quantities and raising prices.
However, forming a cartel is difficult because firms need to agree on quantities and prices, and each firm has an incentive to "cheat" by lowering prices to sell more than it agreed to. A third party, such as a regulator, announcing and enforcing a maximum price level can make it easier for firms to agree on a price and monitor pricing. The regulatory price can be viewed as a focal point that is natural for all parties in the cartel to charge.
Rent controls are a form of price ceiling. These were instituted in the U.S. in the 1940s by President Franklin D. Roosevelt and his newly-formed Office of Price Administration. The Office instituted price ceilings on a wide range of commodities, including rent controls that allowed returning World War II veterans and their families to afford housing.
As predicted by economic models, this policy lowered the supply of rentable properties available to veterans. At the same time, there was an increase in homeownership and the number of homes for sale. This outcome could be explained by landowners converting their rentable properties to sellable ones, due to the financial unviability of the rental market and the lack of incentive for landowners to destroy or leave their properties vacant.
Which one of the following best describes the organization of the passage?
A. The passage defines a concept, discusses its theoretical implications, and then provides evidence to challenge the concept.
B. The passage introduces a policy tool, explains how it works under ideal conditions, and discusses cartels and price controls.
C. The passage presents a concept, explores potential unintended consequences, and then supports the explanation with a historical example.
D. The passage outlines a concept, presents several opposing viewpoints, and concludes by taking a stance on the issue.
E. The passage provides an overview of an economic principle, examines multiple case studies, and suggests improvements to the principle.
There is substantial research showing that under certain circumstances, price ceilings can, paradoxically, lead to higher prices. The leading explanation is that price ceilings can coordinate collusion among suppliers who would otherwise compete on price. More precisely, forming a cartel becomes profitable by enabling nominally competing firms to act like a monopoly, limiting quantities and raising prices.
However, forming a cartel is difficult because firms need to agree on quantities and prices, and each firm has an incentive to "cheat" by lowering prices to sell more than it agreed to. A third party, such as a regulator, announcing and enforcing a maximum price level can make it easier for firms to agree on a price and monitor pricing. The regulatory price can be viewed as a focal point that is natural for all parties in the cartel to charge.
Rent controls are a form of price ceiling. These were instituted in the U.S. in the 1940s by President Franklin D. Roosevelt and his newly-formed Office of Price Administration. The Office instituted price ceilings on a wide range of commodities, including rent controls that allowed returning World War II veterans and their families to afford housing.
As predicted by economic models, this policy lowered the supply of rentable properties available to veterans. At the same time, there was an increase in homeownership and the number of homes for sale. This outcome could be explained by landowners converting their rentable properties to sellable ones, due to the financial unviability of the rental market and the lack of incentive for landowners to destroy or leave their properties vacant.
Which one of the following best describes the organization of the passage?
A. The passage defines a concept, discusses its theoretical implications, and then provides evidence to challenge the concept.
B. The passage introduces a policy tool, explains how it works under ideal conditions, and discusses cartels and price controls.
C. The passage presents a concept, explores potential unintended consequences, and then supports the explanation with a historical example.
D. The passage outlines a concept, presents several opposing viewpoints, and concludes by taking a stance on the issue.
E. The passage provides an overview of an economic principle, examines multiple case studies, and suggests improvements to the principle.
14 Sep 2024, 22:10
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Official Solution:
A price ceiling is a government or group-imposed price control or limit on how high a price can be charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions can occur during periods of high inflation, in the event of an investment bubble, or in the case of monopoly ownership of a product.
There is substantial research showing that under certain circumstances, price ceilings can, paradoxically, lead to higher prices. The leading explanation is that price ceilings can coordinate collusion among suppliers who would otherwise compete on price. More precisely, forming a cartel becomes profitable by enabling nominally competing firms to act like a monopoly, limiting quantities and raising prices.
However, forming a cartel is difficult because firms need to agree on quantities and prices, and each firm has an incentive to "cheat" by lowering prices to sell more than it agreed to. A third party, such as a regulator, announcing and enforcing a maximum price level can make it easier for firms to agree on a price and monitor pricing. The regulatory price can be viewed as a focal point that is natural for all parties in the cartel to charge.
Rent controls are a form of price ceiling. These were instituted in the U.S. in the 1940s by President Franklin D. Roosevelt and his newly-formed Office of Price Administration. The Office instituted price ceilings on a wide range of commodities, including rent controls that allowed returning World War II veterans and their families to afford housing.
As predicted by economic models, this policy lowered the supply of rentable properties available to veterans. At the same time, there was an increase in homeownership and the number of homes for sale. This outcome could be explained by landowners converting their rentable properties to sellable ones, due to the financial unviability of the rental market and the lack of incentive for landowners to destroy or leave their properties vacant.
Which one of the following best describes the organization of the passage?
A. The passage defines a concept, discusses its theoretical implications, and then provides evidence to challenge the concept.
B. The passage introduces a policy tool, explains how it works under ideal conditions, and discusses cartels and price controls.
C. The passage presents a concept, explores potential unintended consequences, and then supports the explanation with a historical example.
D. The passage outlines a concept, presents several opposing viewpoints, and concludes by taking a stance on the issue.
E. The passage provides an overview of an economic principle, examines multiple case studies, and suggests improvements to the principle.
A Incorrect. The passage does not aim to challenge the concept of price ceilings. It provides an explanation of the concept and describes both positive intentions and unintended negative outcomes, but it doesn’t present evidence that challenges or refutes the validity of price ceilings.
B Incorrect. The passage does not explicitly focus on how price ceilings work under ideal conditions. Instead, it explains the intended purpose of price ceilings and primarily discusses unintended consequences like collusion and its impact on prices, rather than contrasting ideal versus non-ideal outcomes.
C. Correct Answer. The passage starts by explaining the concept of price ceilings, then discusses unintended consequences (such as higher prices due to collusion among suppliers), and finally uses a historical example (U.S. rent controls in the 1940s.) to support and illustrate these points.
D Incorrect. The passage doesn’t present opposing viewpoints or take a firm stance. It is written in an objective and explanatory tone, discussing the concept of price ceilings and their consequences without favoring one viewpoint over another or drawing a final conclusion.
E Incorrect. The passage does not examine multiple case studies, nor does it suggest any improvements to the principle of price ceilings. The passage uses only one historical example (U.S. rent controls) and does not propose reforms or improvements to the policy tool.
Answer: C
A price ceiling is a government or group-imposed price control or limit on how high a price can be charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions can occur during periods of high inflation, in the event of an investment bubble, or in the case of monopoly ownership of a product.
There is substantial research showing that under certain circumstances, price ceilings can, paradoxically, lead to higher prices. The leading explanation is that price ceilings can coordinate collusion among suppliers who would otherwise compete on price. More precisely, forming a cartel becomes profitable by enabling nominally competing firms to act like a monopoly, limiting quantities and raising prices.
However, forming a cartel is difficult because firms need to agree on quantities and prices, and each firm has an incentive to "cheat" by lowering prices to sell more than it agreed to. A third party, such as a regulator, announcing and enforcing a maximum price level can make it easier for firms to agree on a price and monitor pricing. The regulatory price can be viewed as a focal point that is natural for all parties in the cartel to charge.
Rent controls are a form of price ceiling. These were instituted in the U.S. in the 1940s by President Franklin D. Roosevelt and his newly-formed Office of Price Administration. The Office instituted price ceilings on a wide range of commodities, including rent controls that allowed returning World War II veterans and their families to afford housing.
As predicted by economic models, this policy lowered the supply of rentable properties available to veterans. At the same time, there was an increase in homeownership and the number of homes for sale. This outcome could be explained by landowners converting their rentable properties to sellable ones, due to the financial unviability of the rental market and the lack of incentive for landowners to destroy or leave their properties vacant.
Which one of the following best describes the organization of the passage?
A. The passage defines a concept, discusses its theoretical implications, and then provides evidence to challenge the concept.
B. The passage introduces a policy tool, explains how it works under ideal conditions, and discusses cartels and price controls.
C. The passage presents a concept, explores potential unintended consequences, and then supports the explanation with a historical example.
D. The passage outlines a concept, presents several opposing viewpoints, and concludes by taking a stance on the issue.
E. The passage provides an overview of an economic principle, examines multiple case studies, and suggests improvements to the principle.
A Incorrect. The passage does not aim to challenge the concept of price ceilings. It provides an explanation of the concept and describes both positive intentions and unintended negative outcomes, but it doesn’t present evidence that challenges or refutes the validity of price ceilings.
B Incorrect. The passage does not explicitly focus on how price ceilings work under ideal conditions. Instead, it explains the intended purpose of price ceilings and primarily discusses unintended consequences like collusion and its impact on prices, rather than contrasting ideal versus non-ideal outcomes.
C. Correct Answer. The passage starts by explaining the concept of price ceilings, then discusses unintended consequences (such as higher prices due to collusion among suppliers), and finally uses a historical example (U.S. rent controls in the 1940s.) to support and illustrate these points.
D Incorrect. The passage doesn’t present opposing viewpoints or take a firm stance. It is written in an objective and explanatory tone, discussing the concept of price ceilings and their consequences without favoring one viewpoint over another or drawing a final conclusion.
E Incorrect. The passage does not examine multiple case studies, nor does it suggest any improvements to the principle of price ceilings. The passage uses only one historical example (U.S. rent controls) and does not propose reforms or improvements to the policy tool.
Answer: C
25 May 2025, 03:06
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I like the solution - it’s helpful. However, I found that the use of the word "concept" is not right because in para 5 price ceiling is referred to as "this policy" therefore the right word to use is policy...
