Minimum and Maximum Pricing Flashcards
1
Q
Why would a government implement a min or max pricing scheme
A
To reduce market failure by bringing efficiency or equity closer to the social optimum
2
Q
What are 3 examples of min pricing schemes
A
- Increasing national minimum wage
- Common agricultural policy
- min price on demerit goods
3
Q
What are 2 examples of a max pricing scheme
A
- Rent controls
- Executive pay caps
4
Q
What is the drawback to a minimum pricing scheme
A
It causes excess supply
e.g. increasing minimum wage causes unemployment
5
Q
What does the government have to take into account when using pricing schemes to avoid government failure
A
- Will it achieve the policy objective
- Is there a better way of approaching the problem
6
Q
What is the drawback of a max pricing scheme
A
Causes excess demand, which causes queues, frustrated customers and potentially giving rise to black markets
