Minimum and Maximum Pricing

Question 1

Why would a government implement a min or max pricing scheme

Answer 1

To reduce market failure by bringing efficiency or equity closer to the social optimum

Question 2

What are 3 examples of min pricing schemes

Answer 2

• Increasing national minimum wage
• Common agricultural policy
• min price on demerit goods

Question 3

What are 2 examples of a max pricing scheme

Answer 3

• Rent controls
• Executive pay caps

Question 4

What is the drawback to a minimum pricing scheme

Answer 4

It causes excess supply

e.g. increasing minimum wage causes unemployment

Question 5

What does the government have to take into account when using pricing schemes to avoid government failure

Answer 5

• Will it achieve the policy objective
• Is there a better way of approaching the problem

Question 6

What is the drawback of a max pricing scheme

Answer 6

Causes excess demand, which causes queues, frustrated customers and potentially giving rise to black markets