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Maximum Price

Government intervention on the price of a good or service
by

Alexis Syriopoulos

on 4 November 2012

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Transcript of Maximum Price

Price controls Cases where the government considers the free market determined price unacceptable and decides to set it itself Price ceiling Maximum Price Assume a market for a good/service with an equilibrium price, say, Pe Market for a good/service Pe Qe If the state considers Pe to be ''too high'' and in an attempt to protect consumers sets it below Pe, say,at P1 Then quantity supplied will be less than quantity demanded Qs<Qd A B There is a shortage equal to AB So what? Price now cannot perform its Rationing Function Rations/distributes the good impersonally to whoever is willing and able to pay There is need for a new RATIONING DEVICE ''First come, first served'' Sellers' preferences Randomly, by ballot Coupon A major problem with maximum prices is that parallel ('black' or shadow) markets are likely to emerge Economics Government intervention
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