Suppose the government is concerned that the price of natural gas, which is used to heat many homes, is too high and people may not have enough money to heat their homes this winter. The government proposes a price ceiling of $60 on natural gas. What will be the impact of the price ceiling on the market?

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BlackTom AI · Accepted Answer

Let’s parse what a price ceiling at $60 means for the natural gas market and then evaluate each option.
Option 1: 'The price ceiling will not be binding and will have no impact on the market.' This would be true if the ceiling were set above the market-clearing price. Since the government proposes a price ceiling of $60 to help households heat homes, it implies the policy is intended to bind if the equilibrium price is above $60. If the equilibrium price is above $60, the ceiling is binding; if not, it’s non-binding. Without the exact equilibrium price given, we cannot assume it won’t bind, but in typical macro questions of this type, a price ceiling intended to help consumers is placed below the equilibrium price, making it binding and impactful. Therefore, this option is likely incorrect given the stated goal of relief for affordability.
Option 2: 'The price ceiling will be binding and cause an excess supply of natural gas.' A binding price ceiling creates a shortage, not excess supply, because it caps price below the market-clearing level, prompting quantity demanded to exceed quantity supplied. Thus, this statement mischaracterizes the directional effect of a price ceiling on supply and demand.
Option 3: 'The price ceiling will be binding and cause excess demand for natural gas.' This aligns with standard supply-and-demand reasoning: a binding price ceiling sets the price below equilibrium, leading to higher quantity demanded than supplied, i.e., a shortage or excess demand. This matches the intended effect of helping consumers but creating a shortage in the market.
Option 4: 'None of the above.' This would be chosen only if none of the prior statements accurately described the outcome. Since Option 3 accurately describes the typical consequence of a binding price ceiling, this 'None of the above' option is not correct.
Overall, the reasoning points toward a binding ceiling below the equilibrium price generating excess demand (shortage), while a binding ceiling would not produce excess supply. The correct interpretation corresponds to the idea that the price ceiling is binding and leads to excess demand, not excess supply, and certainly not no impact. The other incorrect options misstate the binding nature or the direction of the shortage created by the policy.

QAMO 2010-004 Fall 2025 Unit 9: Welfare Economics -- Application Problem

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