Government intervention in markets - maximum and minimum price Flashcards
What is maximum price
Price ceiling set below equilibrium price
What is minimum price
Price floor set above equilibrium price
Why is minimum price used
Used to discourage consumption of demerit goods
Contaction of demand
Consumption discouraged
Quantity decreases
Who is benefitted from putting a minimum price on a price inelastic good
Producers see an increase in revenue
What happens if the minimum price is too high
Going further than internalising costs
Firms may suffer leading to unemployment
When is a maximum price set
Price of the market is deemed too high
Promoting equity eg rented accommodation
What happens if the maximum price is set too low
Too much excess demand
May lead to black markets as excess demand ok to pay at a higher price
How can setting a maximum price lead to more cost for the government
Enforcement costs
If the government arent happy with shortage and increase supply there is a huge opportunity cost
Advantage of maximum price
Leads to a lower price for consumers
Harder to exploit monopoly power
What is a better solution than minimum prices for farmers
offer subsidies to farmers who promote some environmental benefit to society
