Max and Min Prices

• Maximum Price


  Set by the government where the consumption or production of a good is to be encouraged.
• Maximum Price


  Set so that the good does not become too expensive to produce or consume
• Maximum Prices


  Have to be set below the free market price, otherwise it would be ineffective.
• Maximum Prices


  Prevent monopolies exploiting consumers
• Maximum prices control the market price, but this could lead to governement failure if they misjudge where the optimum market price should be.
• Maximum prices could lead to welfare gains for consumers by keeping prices low
• Maximum prices could increase efficiency in firms, since they have an incentive to keep their costs low to maintain their profit level.
• Maximum prices could reduce a firm's profits, which could lead to less investment in the long-run.
• Due to maximum prices on a good, firms might raise the prices of other goods, so consumers might have no net gain.
• Minimum price

  Set by the government where the consumption or production of a good is to be discouraged.
• Minimum price

  E.g. the National Minimum Wage
• Minimum prices would reduce the negative externalities from consuming a demerit good, such as alcohol.
• Minimum Prices


  Have to be set above the free market price; otherwise would be ineffective.
• The minimum wage yields the positive externalities of a decent wage, which increase the standard of living of the poorest, and provide an incentive for people to work.