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1.4 PRICE CONTROL ., ADVANTAGES AND DISADVANTAGES OF MAX PRICES.,…
1.4 PRICE CONTROL .
MIN PRICES
Can discourage consumption of demerit goods and ENCOURAGE PRODUCERS TO PRODUCE MORE.
Price is set above the free-market equilibrium.
Creates a surplus.
Government buy surplus and store it.
Example: National minimum wage.
MAX PRICES
Max prices are a way to keep a good affordable.
Max price is set below the market equilibrium and acts as a ceiling. Illegal for a firm to charge more than a specific price.
Eg Rent controls in New York.
However, it causes excess demand.
BUFFER STOCKS
In commodity markets prices are volatile.
Eg Farmer's income is volatile which may reduce the amount of investment.
Government set price ceiling and price floor.
When the price falls below the floor the Government buy up crops and store them.
When the price goes above the ceiling they sell the crops
Why do Governments intervene in markets?
To correct market failure.
To improve the economic performance of the UK economy.
To address morally unacceptable problems like access to healthcare.
3 types of price control.
Max pricing (price ceiling)
Min pricing (price floor).
Bufferstock (ceiling and floor).
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