LS20 - Minimum and Maximum Pricing

Question 1

Maximum prices

Answer 1

Price set below the market equilibrium by the government.

Question 2

Minimum price

Answer 2

Price set above the market equilibrium. Leads to Excess supply.

Question 3

Advantages of Minimum Pricing

Answer 3

• In agricultural markets, there is food stability. Farmers have income security and therefore would continue to farm
• Reduces the consumption of demerit goods that can cause social costs
• Protects producer income

Question 5

Disadvantages of Minimum Pricing

Answer 5

• Consumers have to pay a higher price
• Excess supply is created showing an inefficient allocation of resources
• Disturbs Signals

Question 6

Advantages of Maximum Pricing

Answer 6

• Increases equality, more people of varying incomes can buy the same good
• Prevents monopolies from exploiting consumers
• Encourage consumption of merit goods

Question 7

Disadvantages of Maximum Pricing

Answer 7

• Excess demand can lead to a black market for the good
• Demand exceeds supply meaning people who want to buy the good can’t

Question 8

Where is minimum price on a graph?

Answer 8

Above the Equilibrium

Question 9

Where is Maximum pricing on the graph

Answer 9

Below the graph

Question 10

What does the minimum pricing strategy lead to?

Answer 10

• Excess Supply.

The excess supply will burden producers. The government intervene to buy the excess supply. However, this can mean that they would have excess supply of a good for no reason. Inefficient allocation of resources.

Question 11

Consumer Impacts by Minimum pricing

Answer 11

• Makes buying more expensive
• Creates inequality as people who have higher incomes can only afford the good
• Taxes may have to rise to fund the government buying the excess supply