3.3.1 Maximum Price

Question 1

Meaning of price controls

Answer 1

It refers to cases where for some reason the government considers the market equilibrium price unsatisfactory and as a result, intervene and sets the price either below or above it

Question 2

What’s is price ceiling ( maximum price )

Answer 2

A legally made mandate maximum price that sellers are allowed to charge for a good

Question 3

Consequences of maximum price

Answer 3

1. Shortage in the short run
2. Non price rationing
3. Underground market
   - Involves buying goods at the legal price, and later selling it at a illegal price (above price ceiling)
4. Negative welfare impacts (refer graph)
5. In the long run
   i) Greater shortage
   ii) Quality of goods may decrease overtime

Question 4

Advantages of maximum price

Answer 4

1. Lower price for consumers
2. Encourage efficiency
3. Prevent producers from raising price

Question 5

Disadvantages of maximum price ceilings

Answer 5

1.Producers are worse off
2. Regulatory capture
- it refers to a regulatory body acting in the interest of the groups dominant in the industry rather that in the interests of the public

3. Black market