1.4.1: Government Intervention in Markets (Minimum & Maximum Prices)

Question 1

When do maximum and minimum prices have an effect?

Answer 1

• Maximum price: the price must be set below the current price equilibrium
• Minimum price: the price must be set above the current price equilibrium

Question 2

What is a maximum price?

Answer 2

• A legally imposed price for a good that the suppliers cannot charge above.
• They are set on goods with positive externalities .

Question 3

What is a minimum price?

Answer 3

• A legally imposed price at which the price of the good cannot go below
• They are set on goods with negative externalities, so that the price is raised to the social optimum point and consumption is discouraged.
• They also encourage producers to produce goods, so can be set on goods with social benefits that are underprovided by the market.

Question 4

What is the equilibrium price?

Answer 4

• It is the market price where the quantity of goods supplied is equal to the quantity demanded

Question 5

What is a buffer stock scheme?

Answer 5

• Where bot maximum and minimum prices are implemented at the same time.
• This is often the case with agricultural products whose prices fluctuate massively such as in the EU Common Agricultural Policy