Define maximum price
A price set below the market equilibrium by the government
Define minimum price
A price set above the market equilibrium price by the government
What are maximum and minimum prices set on usually
Max prices = positive externalities
Min prices = negative externalities
What else might max prices help
They can prevent monopolies from exploiting customers.
What else do minimum prices do
- They can be set on goods with negative externalities, so that the price is raised to the social optimum point and consumption is discouraged.
- They also encourage producers to produce goods, so can be set on goods with social benefits that are underprovided by the market.
Pros of price signals
- They can be set where MSB=MSC, so allow for some consideration of externalities, and so help to increase social welfare.
● A minimum price will ensure that goods are affordable, whilst a maximum price will ensure that producers get a fair price. Both of these are able to reduce poverty and can increase equity/equality.
Cons of price signals
- There is a distortion of price signals and this causes excess supply/demand. Excess demand will lead to questions about how to allocate goods and excess supply will lead to questions about what to do with the surplus goods.
● It is difficult for the government to know where to set the prices, because of the difficulty of knowing the size of externalities and because it will have implications on the size of excess supply/demand.
● Both can lead to the creation of black markets. Maximum prices may also lead to illegal bribes or discriminatory policies in allocating goods.
Check out min and max price diagrams on PMT 1.4 gov intervention pdf detailed notes
What is minimum price equivalent
Excess supply
What is maximum price equivalent
Excess demand
What does maximum and minimum price cause
Market failure - misallocation of resources (inefficient of resources)
What is a guaranteed minimum pricing scheme
A guaranteed minimum pricing scheme is a scheme in which excess supply from a minimum price is purchased by the government at the minimum price. the purpose is to protect producer incomes.
Why do agricultural products need a minimum pricing scheme
- Demand and supply are both price inelastic for agricultural products prices tend to be volatile.
o As a result, the incomes earned by producers is also volatile… some farmers may be forced to leaves the market due to losses caused by falling prices - This can put the food supply at risk going forward .
therefore,
governments could introduce a minimum price to prevent farmers from leaving the market ……
oThe PROBLEM is that the EXCESS supply created will be unsold … So some producers could make a loss. This would be the opposite of what the policy set out to achieve.
oOne way to solve this would be for the government to buy up the excess supply at the minimum price ..that way no producer would lose out … this form of government intervention is called a guaranteed minimum pricing scheme.
What happens to consumer surplus if a min/max price is introduced
min price = decreases
max price = increases
What happens to producer surplus if a min/max price is introduced
min price = increases
max price = decreases
How does a guaranteed minmum pricing scheme solve the agricultural problem
government buys up excess supply at minimum price and sell it meaning farmers have a higher income and government earns revenue
