A fixed price or price ceiling enacted by the government, usually set below the equilibrium market price
The government uses a maximum price to lower the market price and keep it at that level, no higher than the maximum price</b>
Price ceiling
The highest possible price that can now exist in the market, legally prices cannot go above it
Reason for using maximum prices
To encourage or increase the affordability of essential goods and services, if the government feels the market price is efficient but not affordable for most people
Examples of maximum prices
Rent control
Maximum prices on basic groceries
Impact of maximum price
1. Prices are lower
2. Demand expands
3. Supply contracts
4. Excess demand (shortage) occurs
Maximum price
Reduces producer revenue
Maximum price creates a deadweight welfare loss
Impact on consumers
Some consumers benefit from lower prices, but many cannot access the market due to the shortage
Impact on producers
Producers are negatively impacted with a contraction of supply and fall in revenue
Impact on government
Government may be concerned about the unintended consequences like black markets and may intervene to try to correct the issue, but this comes with opportunity costs
