1 - Gov Interevntion - Max Price

Question 1

What’s a max price?

Answer 1

A price set by gov that prevents marker price from rising above certain level

Question 2

What’s the point of max prices?

Answer 2

• make necessities more affordable
• encourage merit goods
• prevent businesses exploiting customers

Question 3

Is a max price set above or below the market price?

Answer 3

Below

Question 4

Consequences of max price

Answer 4

• shortage of the good
• disequilibrium at max price
• lost rationing function, price can’t rise to remove excess demand
  — need to ration in other ways eg. First come first serve served
• potential for gov failure

Question 5

Examples of max prices

Answer 5

• rent control
• energy price cap
• caps for water companies
• bus fare price cap

Question 6

Problems with max prices

Answer 6

• alternative rationing methods wont work well
• suppliers may leave market as they can’t charge high price
• better alternatives eg. Subsidies