Th1.4: Disadvantages of Max and Min Prices

Question 1

What are the three disadvantages?

Answer 1

distortion of price signals
difficult for government to know where to set the prices
creation of black markets

Question 2

Distortion of Price signals, causing…

Answer 2

excess supply/demand.
excess demand will lead to questions about how to allocate goods
excess supply will lead to questions about what to do with the surplus goods

Question 3

Why is it difficult for the government to know where to set prices?

Answer 3

because of the difficulty of knowing the size of externalities
because it will have implications on the size of excess demand/supply

Question 4

Black markets.

Answer 4

both can lead to creation of black markets. maximum prices may also lead to illegal bribes or discriminatory policies in allocating goods

Question 5

What is a buffer stock