Maximum Price

The maximum price is the greatest legal price a seller is allowed to charge for its products. It is sometimes also referred to as price ceiling. As
explained in the theory, the price can fall below this level but cannot rise otherwise the government regulation/law will be violated. The government
uses a price ceiling at times when the equilibrium price set by the invisible hand (market forces of demand and supply) for necessities are unfairly high
and unaffordable for poor people like rice, lentils, wheat, sugar, etc. Other examples include oil, natural gas, and rental housing whose prices need to
be maintained at an acceptable level for ensuring consumers' welfare.

In the case where the Maximum price (MP) is set above the equilibrium price, it will have no effect as the previous equilibrium remains attainable. If,
however, MP is set below the market-clearing price, the price will decrease and is said to be effective in economic terms. The effects of the maximum
price on wheat are illustrated by the following graph;

As shown above, the equilibrium price of wheat is at p, and the quantity traded is Q initially at point B. The government believes that its price should be
decreased for societal welfare so it imposes the maximum price (MP). At this lower price, those firms with a higher average cost will supply less at Q1
at point C. Simultaneously, the fall in its price will also encourage price-insensitive customers to buy more kilos of wheat; a total of quantity Q2 as seen
on the demand curve. This mismatch between what firms want to supply and what quantity of good buyers want to purchase will cause demand to
exceed supply. Hence, the shortage of Q2-Q1 develops.

As a consequence of fixing the maximum price, some people will gain and some people will lose. As the graph tells, the businesses will lose because
they will receive lower revenue per unit from the sale of wheat. This, in turn, could provoke some firms to exit the industry thinking that the government
intervention has made its trading less or not profitable at the current established market price. On the other hand, the consumers who can purchase
wheat at a decreased price will become better off, however, those who have been rationed out and cannot buy it due to the shortage are worse off.

With the enforcement of maximum price triggering an acute shortage of products in the market, some other method of location might be used. For
instance, the small shops or supermarkets can sell their available supplies of wheat on a first come first serve basis. Long queues of vehicles at
these places will develop and the allocation will be based on luck. Alternatively, sellers may pretend that they don't have it and try to sell the remaining
wheat to their relatives, friends, etc first.

Here, the government might also intervene by introducing a system of rationing to counter the unfair distribution of goods and to make sure that the
needy people are not deprived of it. To do this, the state authorities will put a limit on the amount of wheat each person is allowed to purchase. They
can also ration the goods by giving out coupons that are sufficient to buy some of the available supplies. Other ways include distributing wheat
according to the socio-economic group, the number of children a family has, etc.

It must also be borne in mind that such market conditions usually encourage the setup of a black market (goods are sold in violation of price and
rationing laws). Its establishment depends upon the willingness of a few people to risk heavy penalties by running a black market and a large number
of customers ready to purchase the product illegally. To make this market functional, the black marketers will buy Q1 of wheat at a controlled price. It
will be then sold at a higher price at point A for earning supernormal profits.