Maximum price

Question 1

What are price controls?

Answer 1

If the market price is sub optimal of social, environmental or political reasons, the government may decide to control the market price directly

Question 2

What is maximum price?

Answer 2

The government or an industry regulator can set a maximum price to prevent the market price from rising above a certain level. This is also known as a price cap or ceiling.

Question 3

What is the rationale for maximum prices?

Answer 3

To make necessities more affordable, especially for those on low income which reduces poverty

To encourage consumption of goods that are good for social welfare, have positive externalities or where consumers may lack all information

To prevent businesses profiting on the expense of consumers

Question 4

What are the consequences of maximum price?

Answer 4

Causes a shortage of the good

There is a disequilibrium at the maximum price

The price cannot rise to remove excess demand - it has lost its rationing function

The quantity supplied will need to be rationed in a different way eg: first come first served, waiting lists or via shadow market activity

There is potential for government failure

Question 5

What are examples for maximum prices in markets?

Answer 5

Rent controls

Energy price cap

Cap on bonuses and CEO pay

Cap on mobile phone roaming charges

Cap for water companies

Cap on university tuition fees

Question 6

What are the problems with maximum prices?

Answer 6

Excess demand needs addressing - alternative rationing methods may not work well

Suppliers may leave the market if they cannot charge a price high enough to make profit (which would increase any shortage created by the maximum price)

There may be better alternative policies the government could use if it believes the market price is too high eg: subsidies, provision of information, redistribution from rich to poor, government provison