Maximum prices

• What are maximum prices - summary?

  • price ceilings
  • Below market equilibrium - protect consumers from high prices
• Give two examples of maximum prices:

  • Rent control policies
  • Energy price caps
• What are the advantages of maximum price setting (1)?

  • protects consumers
  • reduces inequality gap
  • encourages positive consumption
  • increased consumer surplus & higher real living standards in the long run
  • helps stimulate improvements in productive efficiency because lower costs are needed to increase a producer’s profits
• What are the disadvantages of maximum price capping (2)?

  • Can be a tool for controlling consumer price inflation in the UK, although inflation has been very low in the UK in recent years
  • appropriate way to curtail the monopoly power of “natural monopolies“ or dominant firms preventing them form making excessive profits at the expense of consumers.
• What are the disadvantages of maximum price capping (1)?

  • discourages producers to produce due to less revenue
  • can lead to black markets
  • can lead to job losses in the utility industries
  • distorts the working of the price mechanism
  • the industry regulator may not have enough information when setting the price caps for future years
  • means lower profits which in turn can lead to reduced capital investment by the utility businesses - ultimately consumers suffer if there is under-investment in utility infrastructure
• What does a monopoly diagram look like following a maximum price cap?

  DIAGRAM BELOW: