What are the advantages of a price ceiling?

Answer 1

price ceilings causes black markets to develop.the best example being of rationing where in suppliers start selling the materials meant for ration at higher prices illegaly.

Price ceilings do NOT cause black markets, as price ceilings set the price lower than would be "natural" in a pure capitalistic system, and black markets appear only when the "normal" price of a good is more than what people are willing to pay for it. Black markets also tend to appear when rationing is in place, but price ceilings, while they are often used in conjunction with rationing, do NOT require rationing to be implemented.

THe major consequences of price ceilings are that the producers of the goods under the ceiling are not getting the full compensation they are due. This interrupts the normal feedback loop between price and availability (demand vs supply) that is critical for a capitalistic system to have to achieve "optimal" efficiency. Here are some of the consequences for that lack of efficiency:

• Consumers, able to pay far below the "natural" price for the good, over-consume. That is, they buy far more of the item than normal, and thus are much less efficient in their use of the good.
• Producers suffer loss of income - unless the government makes up the difference between the fixed price and the "natural" price of the good, the producer suffers a loss of expected income. The producer thus has less capital to make efficiency improvements, explore for new sources of the good, or, even to cover its standard operating costs.
• Governments may be forced to pay producers, if the actual cost to produce the good is more than the price ceiling, to prevent all the producers from going bankrupt.

A good example of the harm that poorly-done price ceilings can have is the current situation of petrol (gasoline) for personal vehicles in Iran. The price is set far below "natural" (on the order of $1/gallon). This means that people have very little incentive to chose alternate forms of transportation (such as bicycling, mass transport, etc.), and will chose to drive in many situations that are for convenience only, not economically useful. They thus have a far higher gasoline consumption per capita than many comparable economies. Iranian gasoline producers receive huge subsidies from the government, but still barely enough to cover the cost difference between production costs and retail price. This means that the Iranian petroleum industry cannot invest in any new refineries or technology, leaving the whole industry stagnant and inefficient. Finally, the massive subsidies that the Iranian government must pay to the petroleum producers (just to keep them in business) is a significant drag on their national budget, taking money from other services.

Answer 2

I am not sure if there are any advantages because the end result is a deadweight.

On the contrary, there are many advantages to price ceilings. One is that it lowers the cost for the consumers and therefore encorages consumption. Therefore the demand for that good or service will increase. This is a type of government intervention used to correct market faliure. However a price ceiling must always be put below the equilibrium point or it will have no effect. If the government uses innacurate information, then this can lead to government faliure.