Minimum And Maximum Prices

Question 1

What is a minimum price

Answer 1

A form of government intervention that sets a legal minimum price for a specific good or service usually for demerit goods

Question 2

Give an example of a minimum price

Answer 2

Price for alcohol to reduce consumption of alcohol

Question 3

What are the drawbacks of a minimum price

Answer 3

Result in excess supply - allocatively inefficient
Consumers pay higher price
Create disequilibrium in the market

Question 4

What is maximum price

Answer 4

A limit or cap on a price set by a government or an organisation

Question 5

Give an example of a maximum price

Answer 5

The government set maximum price of 40p for a piece of fruit to encourage consumption of fruit

Question 6

What are Drawbacks of maximum price

Answer 6

Deter firms from entering the market not enough profit margin
Limit investment into industry as less supernormal profit
Firms cut costs to aggressively
Increase gov spending through subsidies increasing national debt