1.

4 Maximum Prices (also called Price Caps or Price Ceilings)

https://www.tutor2u.net/economics/reference/maximum-prices-online-lesson

https://www.uswitch.com/gas-electricity/news/2021/02/05/price-cap-to-rise-april-2021/

https://www.thestar.com.my/news/nation/2021/02/06/ceiling-price-scheme-for-cny-essentials-begins-
monday

Activity 1

Explain what is meant by a A maximum price is a limit or cap on a price set by a government

maximum price
(KNOWLEDGE)
Outline the possible types of
market failure that could be
tackled using a maximum
price, giving examples where
possible (APPLICATION)
or an organisation. It is the highest price that can be set by a
producer, group of producers or a whole industry. A price below
the maximum is acceptable, and no intervention would follow
Goods/services with positive externalities.
Goods/services supplied by monopoly firms.
Goods/services that suffer from an information gap and are
under-consumed.
Goods/services than need to be cheaper to promote factor
mobility. (cheaper transport)
Goods/services that need to be cheaper for some members of
society in order to improve basic standards of living.

APP & ANALYSIS: Adapt the diagram below to show the impact of a maximum price:
Note down 8 markets in which maximum prices have been / are used (use the links above), state which
country for each (use at least one from the UK and China, one food, one service, one labour market) APP.

Currency Price capping for Caps on CEO pay

Train tickets (Hong Kong/ US water bills
dollar)
Energy bills Caps on interest rates Caps on mobile
Rent roaming charges

Activity 2

Select ONE of the markets above and draw a diagram to show the imposition of a maximum price in that
market. Remember to think about carefully labelling the axes, and the elasticities of the demand & supply
curves. APP & ANALYSIS

Market for: Explanation:

Diagram: PED, PES, main effects
Maximum prices for Rent Demand is greater than supply which creates a
shortage.
There is a decrease in prices due to the
maximum price caps.
There is a decrease in supply but an increase in
demand so there will be a shortage.
PED will be inelastic as houses are private and
essential goods.
House prices are too high so a maximum price
cap is needed to make sure people have homes
and are not homeless.
Activity 3

Focus on rent controls, an exam favourite.

Briefly explain why a government might choose to introduce a maximum price on rented housing (“rent
controls”)

Allow income houses to be able to consume.

Outline 4 reasons why rent controls may be ineffective and/or cause other problems in the housing market
(“unintended consequences” EVAL):

1. Homelessness
2. Shortages of rental properties

3. Poverty (council houses)

4. Lower profits for Landlords and as a result, less incentives for private investment (decay of rental
housing stock).

Activity 4

1. Explain one reason why the Sri Lankan government may have decided to introduce a maximum
price on rice. (2)

2. Use a demand and supply diagram to show the likely effect of the maximum price on the
market for rice in Sri Lanka. (4)
3. Analyse the reasons for the Sri Lankan government’s “attempt to support rice growers and
millers”. (6)

4. Evaluate the likely effectiveness of the maximum price for rice in Sri Lanka on consumer
welfare. (8)
General evaluation for maximum prices

Note down some key evaluation points when considering maximum prices and show that they are either
positive (supportive) or negative (against):

Activity 5

Comparing subsidies and maximum prices

Complete the table:

Subsidies Maximum prices

Government Transferring money to landlords Governments may intervene to support
spending businesses
Allocative Price of goods and services are still Market is inefficient.
efficiency determined by the market.
Market is efficient.

Unintended Landlords may become too over reliant Black markets

consequence on governments for their income. Lower quality products
s Less investment from businesses
Output Output increases as governments Output Is reduced as the investment and
provide more subsidies. quality of goods/services decreases.
 Producer
surplus

(show the
changes
before and
after)

Consumer
surplus

(show the
changes
before and
after)

Activity 6

Essay Task KAA and EVAL

Use the information provided on the slides to tackle the following essay question:

Assess the view that maximum prices are more effective than subsidies for making
essential food more affordable. (20)