AS: Unit 1 - Maximum and Minimum pricing, Zero Pricing

In this post we will learn:

1.  Maximum pricing / Price ceilings
2.  Minimum pricing / Price floors
3. Zero pricing

 

Maximum prices

 

Maximum prices may be defined as a price ceiling whereby price of a good or service is not allowed to exceed. It usually below the free market equilibrium price (Pe).

Suppliers therefore are no longer allowed to charge the market price and is forced to meet the maximum price ceiling set by the government.

However this contributes to excess demand (Q2 to Q1) as suggested by the Law of Demand, the lower the price, the higher the demand HOWEVER at 'Pmax' suppliers are not willing to supply what is demanded at 'Q1' and is only willing to supply at 'Q2' thus there is excess demand.

 

Maximum prices may be imposed by the government in an attempt to prevent the market price from rising above and beyond a given amount; for example to prevent the monopolistic exploitation of consumers.

 

Impact (evaluation)

• Can result in a underground market whereby maximum prices is evaded targeting those who are prepared to paid more (to satisfy excess demand) promoting illegal criminal activity. Higher prices therefore act as a device for rationing.
• May lead to corruption and bribery in regulation
• Maximum price above the equilibrium will contribute no effect thus may be considered as Government failure (as government administration costs will exceed the 'benefits')

Minimum pricing

 

Minimum prices may be defined as a price floor whereby price of a good or service is not allowed to go below. It usually above the free market equilibrium price (Pe).

Suppliers therefore are no longer allowed to charge the market price and is forced to meet the minimum price floor set by the government.

 However this contributes to excess supply (Q3 to Q1) as suggested by the Law of Supply, the higher the price, the higher the supply HOWEVER at 'Pmin' consumers are not willing to pay what is supplied at 'Q1' and is only willing to pay at 'Q3' thus there is excess supply.

 

Minimum prices may be imposed by the government I an attempt to prevent the market price from falling beyond a given amount; for example to prevent over consuming of  a demerit good. 

 

Impact (evaluation)

• Prevents the market from working efficiently therefore may lead to further misallocation of resources.
• Minimum price below the equilibrium will contribute no effect thus may be considered as Government failure (as government administration costs will exceed the 'benefits')

Zero Pricing

This illustrates the effect of the market when a  good is produce free at the point of use. This suggests a market price of 0. For example the NHS health care (though we 'pay' for it through taxation it is free at point of use). However demand for this service will most likely lead to excess demand (Q2 - Q1) thus disequilibrium resulting in waiting lists.

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