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Maximum Prices
Revision Notes
Key Points
- Maximum prices are a form of government intervention that sets the highest possible price for a good or service
- Reasons for setting maximum prices include making essential goods affordable, preventing price gouging, and controlling inflation
- Advantages of maximum prices include ensuring affordability, protecting vulnerable consumers, and controlling inflation in the short-term
- Disadvantages of maximum prices include creating shortages, discouraging production and investment, and leading to black markets and parallel trading
- Determining the appropriate maximum price level can be challenging
Definition of Maximum Prices
Maximum prices are a form of government intervention where the government sets the highest possible price that can be charged for a good or service.
Reasons for Setting Maximum Prices
- To make essential goods and services **affordable** for lower-income households
- To prevent **price gouging** and **profiteering** during times of shortage or crisis
- To maintain **price stability** and control **inflation**
Advantages of Maximum Prices
- Ensures **affordability** of essential goods and services
- Protects **vulnerable consumers** from exploitation
- Can help **control inflation** in the short-term
Disadvantages of Maximum Prices
- Can lead to **shortages** if the maximum price is set below the **equilibrium price**
- Discourages **production** and **investment** in the affected markets
- Can create **black markets** and **parallel trading**
- Difficult to determine the **appropriate maximum price** level