The correct option is 1 and 2 only.
Explanation
A price ceiling is a government-imposed maximum price that sellers are allowed to charge for a good or service. To be effective, it is set below the natural market equilibrium price. This policy is typically used to make essential commodities, such as wheat or fuel, affordable for the general population.
Statement-wise Analysis:
- Statement 1 is Correct. When the government sets a price ceiling below the equilibrium price, the lower price incentivizes consumers to demand more (Law of Demand) while discouraging producers from supplying as much (Law of Supply). Consequently, the Quantity Demanded ($Q_d$) exceeds the Quantity Supplied ($Q_s$), resulting in a shortage (excess demand) in the open market.
- Statement 2 is Correct. Since the price mechanism is no longer able to allocate the scarce goods to those willing to pay the market price, an alternative allocation mechanism is required. Governments or sellers must implement rationing systems (such as ration cards, quotas, or long queues) to distribute the limited supply among the excess number of buyers.
- Statement 3 is Incorrect. Price ceilings do not eliminate black marketing; conversely, they often create it. Because a shortage exists and some consumers are willing to pay a price higher than the legal ceiling to secure the good, an illegal market (black market) often develops where the good is sold at a price above the ceiling.
Key Takeaway:
A binding price ceiling creates a market disequilibrium characterized by excess demand (shortage). This necessitates non-price rationing mechanisms and frequently leads to the emergence of black markets.