maximum price

Question 1

maximum price analysis

Answer 1

1. set affect of imposing a maximum price, confirms the market price down from P1 to Pmax
2. This effectively create a new demand curve D2Pmax
3. The maximum price causes a disequilibrium in the free market price mechanism which create excess demand as QD is greater than QS AT MAXIMUM PRICE
4. Quantity supplied falls from Q1 to Q2 as there is a contraction in supply
5. The new equilibrium in the market is Q2 D2Pmax
6. However, the fall in quantity traded assumes the features of perfect competition.
7. In reality, supply me a knock contract if firms have significant monopoly power or if supply is very price inelastic.

Question 2

PED inelastic

Answer 2

1. The effect of imposing a maximum price could force the market price down from P1 to Pmax
2. This effectively create a new demand curve D2 Pmax
3. In reality, the price cap may be particularly effective, if there is price, inelastic, demand and supply
4. Which is likely for a product, which has limited storage capacity. Which limits the responsiveness of supply.
5. Consequently, there is a small fall in quantity traded.
6. this means the policy could be effective at addressing excessive price, setting in competitive markets for goods

Question 3

possibility of regulatory capture

Answer 3

1. The effectiveness of maximum price may depend upon hull. Frequent regulator allows increases in price cap
2. More regulator review of price caps could be a good decision if it changes in costs of production for firms.
3. There’s also a risk of regulatory capture.
4. Wikipedia capture is an economic theory that says regulatory agencies may become dominated by industries or interests they are charged with a regulation
5. This is particularly problematic in industries with a high degree of asymmetric information.
6. Asymmetric information can be defined as when one party has more knowledge of market conditions than the other party.