Price controls and market failure

Question 1

Why are Minimum prices used ?

Answer 1

Used to discourage consumption of demerit goods

Question 2

What are some counterpoints of using minimum prices to stop market failure ?

Answer 2

If demand is inelastic , the fall in demand will not be as much to fix MF

Regressive for the poor which can widen income inequality

Creates black markets for cheaper products which reduces tax revenue

If not set at a right level firms could leave the market as demand falls

Question 3

Why are maximum prices used ?

Answer 3

They are used in markets where the price is deemed to be too high

By using the ceiling below equilibrium - it promotes the consumption of essential goods

E.g rent controls

Question 4

What are some counter points for using maximum pricing to solve market failure ?

Answer 4

Shortages are created - excess demand cannot be fulfilled

Black markets created for those who cant access the good as they are willing to pay above for the good

Enforcing the rules can be expensive

If max Price is set at good level