77d ago

Maximum prices

Maximum price- a price set by the government below the equilibrium price which firms cannot legally go above.

Why is a maximum price set?

  • To prevent firms using market power to increase market prices to make above normal profit.

  • To make products affordable for low income earners.


Consumers

  • Price is now lower, real income are going to increase, benefiting our lower income earners the most.

  • However, at Pmax there is now a lower supply of rented accomodation, meaning that less people are able to live in NY as a result. Fall of supply from Q to Qs.

  • Qs consumers will benefit from the intervention (P falls to Pmax) but Qs-Qd now live elsewhere.

  • Who gets to live in NY/ who are those that consume Qs?

  • First come, first serve/ queuing system → quickest to consume benefit, others don’t.

  • Based on need → give housing to those on low income/ benefits.

  • Parallel markets → people renting illegally, usually at higher price.

Producers

  • Revenue falls from P*Q to Pmax*Qs.

  • Potential unemployment.

Government

  • The government must intervene further to remove the excess demand in the market.

  • Solutions: Option 1- subsidy - the government can provide a subsidy to icentivise more supply in the market.

  • Pmax is maintained and everyone that wants accommodation gets it (Qd).

  • However very expensive for the government.

  • The subsidy also helps rich and poor alike, is this a good use of government spending? Opportunity cost?

  • Option 2 - Segregate market

  • The subsidised price is only available to the people that need it, i.e. richer consumers pay the higher price.

  • Does this create an incentive to lie about income?

  • How do we decide the threshold?

  • Option 3 - Direct provision by the government.

  • The government builds and rents out apartments themselves, shifting supply right to S1, new equilibrium S1 = D

  • Government is successful in helping people afford housing.

  • But this could take time to provide if not enough built already.

  • This will cost the government a lot of money to provide; opportunity cost exists.

  • However, the government does recieve rent from tennants, increasing government revenue (Qd -Qs) * Pmax

  • Another issue → government provision is often inefficient - are those it is aimed at the only that benefit?

Society

  • Society is better off, lower prices and higher quantity.

  • Improved equity and economic wellbeing



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Maximum prices

Maximum price- a price set by the government below the equilibrium price which firms cannot legally go above.

Why is a maximum price set?

  • To prevent firms using market power to increase market prices to make above normal profit.

  • To make products affordable for low income earners.

Consumers

  • Price is now lower, real income are going to increase, benefiting our lower income earners the most.

  • However, at Pmax there is now a lower supply of rented accomodation, meaning that less people are able to live in NY as a result. Fall of supply from Q to Qs.

  • Qs consumers will benefit from the intervention (P falls to Pmax) but Qs-Qd now live elsewhere.

  • Who gets to live in NY/ who are those that consume Qs?

  • First come, first serve/ queuing system → quickest to consume benefit, others don’t.

  • Based on need → give housing to those on low income/ benefits.

  • Parallel markets → people renting illegally, usually at higher price.

Producers

  • Revenue falls from P*Q to Pmax*Qs.

  • Potential unemployment.

Government

  • The government must intervene further to remove the excess demand in the market.

  • Solutions: Option 1- subsidy - the government can provide a subsidy to icentivise more supply in the market.

  • Pmax is maintained and everyone that wants accommodation gets it (Qd).

  • However very expensive for the government.

  • The subsidy also helps rich and poor alike, is this a good use of government spending? Opportunity cost?

  • Option 2 - Segregate market

  • The subsidised price is only available to the people that need it, i.e. richer consumers pay the higher price.

  • Does this create an incentive to lie about income?

  • How do we decide the threshold?

  • Option 3 - Direct provision by the government.

  • The government builds and rents out apartments themselves, shifting supply right to S1, new equilibrium S1 = D

  • Government is successful in helping people afford housing.

  • But this could take time to provide if not enough built already.

  • This will cost the government a lot of money to provide; opportunity cost exists.

  • However, the government does recieve rent from tennants, increasing government revenue (Qd -Qs) * Pmax

  • Another issue → government provision is often inefficient - are those it is aimed at the only that benefit?

Society

  • Society is better off, lower prices and higher quantity.

  • Improved equity and economic wellbeing