Suppose that the current equilibrium price of gasoline is $3.50 per gallon and that the government passes a law that requires the price to be no more than $3 per gallon. What will be the effects?

What will be an ideal response?


The fall in price from $3.50 to $3 causes quantity demanded to increase and quantity supplied to decrease, which implies a shortage. Some way must be found to ration the gasoline that is supplied. The government may provide people with coupons that are necessary to use to buy gasoline. Alternate ways to ration the gasoline are for gas station attendants to receive illegal payments or gifts, queuing, favoritism, or any number of other ways.