Maximum Price

• What is a 'Price Ceiling' or 'Price Cap'?

  A maximum price set by the government
• What is the purpose of a maximum price?

  To ensure prices do not rise too high
• How might a government deal with excess demand due to maximum price control?

  By increasing supply through subsidies
• What are buffer stocks used for in price stabilization?

  • Maintain price stability
  • Buy surpluses when prices are low
  • Release stocks when prices are high
• What is an opportunity cost in the context of government intervention?

  Resources used could provide alternatives
• What is government failure?

  Less efficient resource allocation due to intervention
• How can maximum price controls lead to government failure in Venezuela?

  By causing a fall in living standards
• What happens to prices in unofficial markets when maximum price controls are imposed?

  Prices increase in unofficial markets
• What is the effect of setting a maximum price below the market equilibrium price?

  It creates excess demand or a shortage
• What are the effects of a maximum price on the market for rice in Sri Lanka?

  • Limits price charged by sellers
  • Creates excess demand (Qd > Qs)
  • Requires alternative rationing systems
• What are the three forms of price controls?

  Price floor, price ceiling, fixed price
• What is the relationship between maximum price and market equilibrium price?

  Maximum price must be below equilibrium price
• What happens to consumer demand at the maximum price?

  Consumer demand increases due to lower prices
• What is the impact of a maximum price on producer surplus?

  Producer surplus decreases due to lower prices
• What are the advantages of using a maximum price?

  • Makes goods affordable for low-income buyers
  • Reduces monopoly pricing power
  • Promotes equitable access to merit goods
• What are the disadvantages of using a maximum price?

  • Inefficient resource allocation
  • Creates excess demand and deadweight loss
  • Encourages illegal markets to form
• How does the price elasticity of demand (PED) affect the size of the shortage created by a maximum price?

  More inelastic demand leads to a smaller shortage
• Why might subsidies be a more effective intervention than maximum prices?

  They increase supply and affordability of goods
• What is the effect of maximum prices on monopoly power?

  They can reduce excessive pricing by monopolies
• What might happen to market supply in the long term due to maximum price controls?

  Market supply may decrease due to lower profits