A hot summer's day can lead to dramatic increases in the demand for electricity.Suppose the government decides a binding price ceiling is necessary so pensioners can continue to afford their power bills.The effect of this policy will be such that:

Question

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A binding price ceiling is a maximum price set by the government that prohibits prices from going above a certain level. With a price ceiling on electricity, the price cannot rise to reflect the increased demand during a hot summer, so electricity producers have no incentive to increase supply. As a result, they may reduce supply, leading to a shortage in the market. Choice A is incorrect because, with a price ceiling, the quantity supplied is unlikely to remain unchanged. Choice B is incorrect because producers have no incentive to increase supply when faced with a price ceiling. Choice D is also incorrect because demand is unlikely to decrease as a result of a hot summer, and a price ceiling would not lead to a decrease in price in this situation.

A Hot Summer's Day Can Lead to Dramatic Increases in the Demand