LS20 - Max And Min Prices

Question 1

Maximum price

Answer 1

Price set below the market equilibrium price by the government

Question 2

Minimum price

Answer 2

Price set above the market equilibrium price by the government

Question 3

Guaranteed minimum pricing scheme

Answer 3

Scheme in which excess supply from a minimum price is purchased by the government at the minimum price - to protect producers income

Question 4

Advantages of guaranteed minimum pricing scheme

Answer 4

Producers incomes increase or stabilise - greater investment and employment
Greater security for food supply
Surplus can be stockpiled or used as aid

Question 5

Disadvantages of minimum pricing schemes

Answer 5

Opportunity costs of government finances, may raise taxes or cut spending elsewhere
Surplus may be sold overseas at low prices, damages farmers in developing countries that are likely to struggle to compete
Difficult to set price at right level - information gap
Storage and security costs for stockpile

Question 6

Advantages of maximum prices

Answer 6

Lower price for consumers

Question 7

Disadvantages of maximum prices

Answer 7

Shortage created - goods and services may be distributed on first come first serve basis
Black markets may emerge
Cost of enforcement is an opportunity cost
Difficult to set at right level - information gap
Rental market - producer surplus falls , landlords have less money to invest and maintain property, decline in quality of housing stock

Question 8

Advantages of minimum prices

Answer 8

Agriculture markets - food stability and producer income protected
Can reduce consumption of demerit goods such as alcohol

Question 9

Disadvantages of minimum prices

Answer 9

Excess supply created - some producers unable to sell goods
Higher prices for consumers, Decreased consumer surplus
Excess supply shows waste of resources that could’ve been spent elsewhere