4.1.8.9 Government Intervention: Max. Prices

Price Controls

a type of government intervention to change the price in a market

price ceiling/maximum prices

a limit set by the government to stop prices from going above a certain level

necessities to make them more affordable

What are price ceilings usually applied to?

shortages, demand rises and supply falls

If price ceilings are below market price it can cause:

no impact

if price ceilings are above market price there will be:

Disequilibrium in the market, Demand > Supply

impact of price controls

affordability for necessities, reduces inequality, protects consumers during crisis

Advantages of maximum price

shortages, discourages investment, encourages black markets

Disadvantages of maximum price

Price cap => makes essential goods/services more affordable => ensures low income earners are able to meet basic needs

Explanation for affordability for essential goods

Berlin rent cap(2020-21) introduced to make housing more affordable to counter rising rents

Application for affordability for essential goods

price cap => limits how much firms can charge => shrinks wealth gap => allows vulnerable groups to afford goods they otherwise would not be able to

Explanation for reduces inequality

Venezuela’s price controls aimed to make food and medicine more accessible to poorer citizens in a highly unequal society

Application for reduces inequality

price cap => firms cannot charge higher prices during times of crisis => consumer protected

Explanation for protects consumers during crisis

some governments impose price caps on essentials, i.e. fuel, during natural disasters to prevent profiteering

Application for protects consumers during crisis

price cap => prices stay artificially low => lack of profit => firms disincentivised to keep producing => supply galls and demand rises => shortage

Explanation for creates shortages

Venezuelan citizens forced to queue for hours or turn to black markets due to shortages caused by price caps

Application for creates shortages

price cap => firm disincentivised to invest in improving production => long term issues, i.e. lack of supply/poor quality

Explanation for discourages investment

Berlin rent cap discouraged property owners from investing in housing, exacerbating long-term supply issues

Application for discourages investment

Price caps => shortages => emergence of black market => where prices are higher => undermines goal of affordability => worse situation for consumers

Explanation for encourages black markets

black markets

where goods/services are trade in a illegal marketplace without government approval or regulation

price caps caused thriving black market in Venezuela

Application for encourages black markets.

effectiveness of gov. enforcement, difference between market and max. price, outcome of complementary policies

What would the success of max. prices depend on(AO4)?

depends on if govs. can effectively monitor and enforce the price limits

Effectiveness of max prices depends on gov. enforcement

large gaps=>larger shortage, but if gap is small this effect will be reduced

Difference between market price and max. price

more successful when combined with other policies, i.e. subsidies

outcome of complementary police son max. prices