Sri Lanka Assuming a Competitive Essay

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Under normal conditions, the ceiling will have no effect:

The price ceiling is above the equilibrium point, so there is no long-term change in the price or quantity of rice in the market. if, however, the price ceiling is set at a level lower than the equilibrium level, there will be a shortage of rice on the market:

Suppliers will be induced to violate the price ceiling because they know that there is demand in the market at a higher price point. At any point between the price ceiling and the equilibrium price the suppliers will still be able to sell rice:

The government likely implemented the price ceiling in order to ensure that the poorest people can afford to eat rice. The government would need to support this market distortion in two ways. The first is that the government would likely need to enforce the price ceiling strictly, as merchants would otherwise have incentive to exceed the price ceiling.

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The second is that the government would likely need to bring in and distribute its own supply of rice as the market would have insufficient incentive to meet the need at the ceiling price. The government would be in a situation where the price ceiling did not solve the original problem in the long-run. Thus, direct government intervention in the market will be required in order to support the market under the new conditions that arose with the initial government intervention in the market. The government has caused a market failure and must therefore create an artificial market in order to rectify the problem. In the long run, the Sri Lankan government may need to enter the rice-growing business as….....

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