Sugar Price Ceiling Case Study

The Trade Ministry will impose the price ceiling of sugar at Rp 12,500 (93 US cents) per kilogram starting in March, a top official has said. The ministry’s domestic trade director general Oke Nurwan said the government had issued import licenses to nine sugar producers to import 400,000 tons of raw sugar. “Next month we will implement our plan so that it will help the sugar price [go] down,” said Oke in Jakarta on Wednesday as reported by kompas.com, adding that the raw sugar would be manufactured by local producers before being handed over to the distributors. He said the government would not regulate the prices from distributors to traders in markets and stressed that the sugar prices to consumers should be Rp 12,500. “The most important

Due to imposition of price ceiling, the quantity supplied is lower than that of in normal times. In the above diagram the quantity supplied Qs is corresponding to the price Pc, which is the ceiling price. This quantity Qs way is lesser than the equilibrium quantity Qe which the suppliers would have supplied normally at the equilibrium price Pe. The imposition of price ceiling also creates a high demand in the market. Now the consumers would be demanding the quantity Qd at a price Pc which is lower than the equilibrium price Pe. This leads to a situation of disequilibrium as the price ceiling prevents the market from clearing up and creating an excess demand in the

The consumer surplus area is indicated by the area a+b. This area is under the demand the curve and is also above to the Pe. The producer surplus is the area which is over the supply curve and under the Pe. This is represented by the areas c+d+e. At this point, the producer plus consumer surplus is at the peak and is : a+b+ c+d+e. At this point the Marginal Benefit is equal to the Marginal Cost (MB = MC) and as such there is allocative efficiency in the market. Now at this point, if the government goes for price ceiling, Pc, the consumer and producer surplus changes. The new consumer surplus is the area under a+c and the producer surplus is limited just to e. The total producer plus consumer surplus is now at just a+c+e. If this area is compared with the previous surplus area, (prior to imposition of price ceiling) it would be seen that the areas under the triangle b and d have been lost. This area represents the welfare loss or deadweight loss to the society and happens because of the price ceiling, creating allocative