(b) Discuss whether attempts to help poorer consumers through the introduction of a

maximum price for necessities can ever be successful. [12] （S16-21）

A maximum price is a limit or cap on a price set by a government with the aim of reducing prices
below the market equilibrium price –it is the highest price that can be set by a producer, group of
producers or a whole industry.

Examples of maximum prices

Maximum prices for train tickets. --With monopoly power, train companies could increase the
peak tickets, but governments may impose a maximum price to keep tickets affordable–even if it
leads to over-crowding.
Maximum price for rent. --Governments have tried different types of rent control–keeping the
cost of renting below a certain level.
Maximum price for food. --In some developing economies, there are maximum prices for certain
foodstuffs to keep them affordable.

The reasons for imposing a maximum price

The government makes a normative judgement that the market-clearing price is too high, and
needs to be reduced. The government may impose a maximum price for a variety of reasons.
1. Guarantee that everyone can afford the necessities–without a maximum price, people with
lower income may be unable to afford good or service essential for living. By reducing the price, it
can help reduce relative poverty and increase equality.
2. Reduce monopoly exploitation. If firms have monopoly power, they can charge high prices to
consumers – higher than the marginal cost of production and higher than in a competitive
market. A maximum price can be a way of reducing ‘monopoly prices’ and also increase allocative
efficiency. （A2 知识点）
3. Resource allocation. If rents were very high, it may cause investors to concentrate on building
new houses and ignoring other aspects of the economy. However, an excess of house-building
could contribute to a bubble in home-building – which leaves the market vulnerable to a
correction in prices. For example, housing bubbles in Ireland and Florida pre-2007 credit crisis. A
maximum price limits the resources flowing to houses and enables a more balanced economy.
4. Prevent hoarding activity

Impact (Problems ) of maximum prices

Create shortage. -- A maximum price distorts the market and leads to disequilibrium. The
demand is greater than supply at maximum price indicating that many consumers will be unable
to get the product at all. For example, cheap rents are no good if it leaves many people homeless.

Encourages the emergence of black market. -- Because of the shortage, it creates the incentive
to develop a ‘black market’ where people illegally trade the good. People could buy the good at
the low maximum price and then resell to those customers who were unable to buy them. This is
potentially quite lucrative as some of those customers who missed out may be willing to pay a
very high price. But the quality of product on black market can not be guaranteed, which might
The cost of government supervision and governance of the black market is relatively high

Require an alternative system of resource allocation, such as queuing or drawing a prize.

Price controls prevent the price system from rationing the available supply, some other
mechanism must take its place. Foe example, one consequence of a maximum price is that
people will end up queuing to try and get the good before it sells out. This will encourage people
to spend longer and longer in queues before it runs out. This time spent queuing represents a
significant cost in terms of time.

Less investment in the long term.-- The market will become less profitable for firms. In the long-
term, this may lead to less investment and also decrease supply in the long-term. For example,
rent controls may be a way to deal with the short-term problem of expensive housing. But
reducing rents will discourage some landlords from letting out property. It may also discourage
people from building houses.

Evaluation of Maximum prices

PES. -- If supply is very inelastic, then a maximum price will only slightly reduce the supply of the
good, therefore, the shortage problem caused will not be very serious. If the supply is very
elastic, then a maximum price will significantly reduce the supply of the product. Therefore, the
quantity consumed will be far smaller than before imposing the price control.

Incentives to increase supply. --The most effective way to implement maximum prices would be
to also try and deal with the undersupply problem. If housing is too expensive, a long-term
solution is to build more affordable housing – and not just rely on maximum prices.
In terms of the shortage problem, government could provide subsidy or other incentives to
encourage production and supply. Not only could the shortage problem be overcome,but also
more products could be accessed by poor consumers.

Reduce monopoly. -- Maximum prices may be most useful in the case of a monopoly who is both
restricting supply and inflating prices. An alternative may be to reduce the power of monopolies;
though, in some industries, this is not possible – so maximum prices will be the most effective.

Conclusion – maximum price implementation often bring much problem. There are many
‘unintended consequences’ of maximum price. Only in rare occasion they work and able to
achieve the original objectives.

b. maximum price – price ceiling, forbid producers to sell at a price higher than the set price.
Often, max price is set to ensure that certain goods and services, like basic food items, bus fare or
rent, are made affordable to the low income group. If the maximum price is set above the market
equilibrium, this will not have any effect. If it is below, then, this max price will be effective.

Will it be successful? Max price encounters a few problems.

There will be a shortage at the effective minimum price. Some consumer will not be able to
obtain the goods they want, even if the maximum price makes it affordable.

There is a tendency for black market to operate, as the shortage make the price in black market
much higher. Unscrupulous producer may even hoard or hide their supply and sell them at the
black market, further reducing the supply in the market.

Max price may lead to wastage. As the price is low, below equilibrium, the rationing function of
price will not be effective. Thus, manufacturer may buy a lot of these items as their raw materials
for production. Eg. flour.

Quality of the goods may suffer. As demand exceeds supply, the producer will not bother much
with providing good quality or service. Rent control is one example.

Over-consumption – max price for sugar. Malaysia a case in point. Many cases of obesity and
diabetic due to over consumption of sugar.

Maximum can be successful if the government is able to estimate the level of shortage at the
max price set and provide alternative supply to the market. they could either import or produce
on their own to increase the supply.

Conclusion – maximum price always has good intention, but the implementation often fraught
with a lot of difficulty. However, it is not doom to fail. Maximum price can work, or at least reduce
the problem, if steps are taken to anticipate the shortage as a result of the policy and control in
the manner of distribution for falling into the wrong target group.