max and min price

• Minimum price


  A fixed price or a price floor enacted by the government, usually set above the equilibrium market price
• The government is saying the equilibrium price in the market is too low, so they want to raise it by implementing a minimum price
• Price floor


  The lowest price that can legally exist in the market
• Reasons for governments to use minimum prices

  • To protect producers from price volatility, especially farmers and producers of primary commodities
  • To solve market failures by raising price, discouraging consumption and production of goods/services that do harm to society
• Impact of minimum price


  1. Price increases

  2. Demand contracts

  3. Supply expands

  4. Excess supply (surplus) created
• Excess supply created


  Burden on producers as they have high costs but can only sell the lower quantity demanded
• Government intervention to address excess supply


  Intervention buying - government buys up the excess supply
• Cost of intervention buying


  Price of minimum price multiplied by the quantity of excess supply
• With intervention buying


  Producer revenue increases as they sell the full quantity supplied at the minimum price
• Without intervention buying


  Producer revenue only increases for the quantity demanded at the minimum price
• Minimum price creates a deadweight welfare loss
• Impact on stakeholders


  • Consumers - pay higher prices, consumer surplus eroded, regressive impact on low-income households
  • Producers - benefit if there is intervention buying, but may struggle without it
  • Government - concerned about cost of intervention buying, unintended consequences like black markets
• Maximum price


  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)
• 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