Explain the consequences of price fixing by the government, with diagrams.

1. 1 · Introduce. Governments sometimes override the market price to protect consumers (ceiling) or producers and workers (floor).
2. 2 · Price ceiling with diagram. [Diagram: D and S; a horizontal ceiling line below equilibrium; the gap between Qd and Qs marked as shortage]
3. 3 · Consequences of a ceiling.
   • Shortage and queues
   • Rationing and black markets
   • Lower quality, less investment
4. 4 · Price floor with diagram. [Diagram: D and S; a horizontal floor line above equilibrium; the gap between Qs and Qd marked as surplus]
5. 5 · Consequences of a floor.
   • Surplus the government must buy or store
   • Cost to taxpayers and waste
   • Minimum wage may reduce low-skilled jobs
6. 6 · Numerical illustration. Ceiling at Rs. 120: shortage 1,500. Floor at Rs. 180: surplus 1,500, costing Rs. 270,000 a day to buy.
7. 7 · Sri Lankan business link. Maximum retail prices for essentials; guaranteed paddy price; national minimum wage.
8. 8 · Conclude with alternatives. Targeted cash support, subsidies and buffer stocks protect the vulnerable with fewer side effects.

Scoring tip: Two clean diagrams, one for each control, are worth half the marks.