22-Maximum Prices

Question 1

What is a maximum price and what does it do?

Answer 1

A maximum price controls or price ceilings have been used by governments in a variety of contexts, e.g rented accommodation, for wages of rugby league players and for items of food.

It makes it illegal for firms to charge more than a certain price for a given quantity of a product

Question 2

How is price maximisation found on a supply and demand diagram?

Answer 2

• A straight line below equilibrium.

- There will be a shortage

Question 3

What could the maximum price shortage lead to?

Answer 3

A black market- in which those in supply of the products sell it illegally at a price significantly higher than the maximum price.

Question 4

Advantages if maximum prices?

Answer 4

• They enable consumers on low incomes to be able to afford to buy a product
• They help prevent an increase in the country’s rate of inflation

Question 5

Disadvantages of maximum prices?

Answer 5

• There is a danger that shortages mean that some consumers are unable to find supplies of the product
• Producers may exit the market in order to use their resources to produces goods that are profitable
• If the government subsidies producers to encourage them to maintain output, then there will be a significant cost to the tax payer