Why do governments fix minimum and maximum prices?

Why do governments fix minimum and maximum prices?

Price control is an economic policy imposed by governments that set minimums (floors) and maximums (ceilings) for the prices of goods and services in order to make them more affordable for consumers.

What is the purpose of setting maximum prices?

A maximum price means firms are not allowed to set prices above a certain level. The aim is to reduce prices below the market equilibrium price.

Why does the government set maximum prices to certain goods?

The government or an industry regulator can set a maximum price to prevent the market price from rising above a certain level.

Why for some commodities government fixed the maximum price?

The price at which quantity demanded of a commodity is equal to its quantity supplied of that particular commodity is called the equilibrium price. To protect the interest of consumers the government is found to fix the maximum price of the commodity.

What is maximum price legislation?

Price Control: The Maximum Price Legislation: In order to protect the interest of the consumers the government imposes price ceiling or maximum price above which no one will sell the commodity. This is called ‘price ceiling’ or ‘maximum price legislation’.

What are the effects of maximum price legislation?

(b) (i) It stimulates excess demand which cannot be satisfied i.e. shortages in the market. (ii) It encourages hoarding of commodities by sellers so as to sell above the maximum price. (iii) It leads to creation of parallel markets or under the counter sales.

Why are price controls required?

That is the essential role of prices: They reflect the current state of supply and demand in an economy and work as an incentive mechanism for producers to produce more when prices rise and for consumers to consume more when prices fall. A price cap also destroys any incentive to put the scarce resource to best use.

What effect does maximum price legislation have?

When a maximum price is set for a good, it increases the quantity demanded while the quantity supplied decreases, thereby resulting in persistent excess demand or shortage of the good.

What happens when the government fixes the maximum price?

When government fixes price of a product at a level higher than equilibrium price, it is called support price (or floor price). It is the minimum price at which a commodity can be purchased. It leads to more supply and short demand. As a result supply becomes in excess of demand.

What is meant by fixing a maximum price?

Definition – A maximum price occurs when a government sets a legal limit on the price of a good or service – with the aim of reducing prices below the market equilibrium price. For example, the government may set a maximum price of bread of £1 – or a maximum price of a weekly rent of £150.

What are the possible effect of government fixing a maximum price control on a commodity?

So, it fixes a maximum price at OPmax, below the equilibrium price (OPmax < OP). At this lower price, consumers demand a larger quantity OQ2 but producers cut back their supplies to OQ1. The immediate effect of this price ceiling is, thus, the emergence of excess demand or persistent shortage of the commodity.

What would happen if the government set a maximum price?

For example, the government may set a maximum price of bread of £1 – or a maximum price of a weekly rent of £150. If the maximum price is set above the equilibrium price then it will have no effect. If the maximum price is set below the equilibrium price, it will cause a shortage – demand will be greater than supply.

What are the causes of price fixing?

An increase in consumer demand can also cause uniformly high prices for a product in limited supply. Price fixing relates not only to prices, but also to other terms that affect prices to consumers, such as shipping fees, warranties, discount programs, or financing rates. Antitrust scrutiny may occur when competitors discuss the following topics:

What are the disadvantages of price regulation?

1 Shortage. A maximum price distorts the market and leads to disequilibrium. 2 Encourages black market. Because of the shortage, it creates the incentive to develop a ‘black market’ where people illegally trade the good. 3 Queues. 4 The market will become less profitable for firms.

What is price fixing in antitrust law?

Price Fixing. Price fixing is an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor.