Maximum Price

A maximum price is set by the government to limit the price to a certain price level. It must be set under the market equilibrium price or it will have no effect.

The market equilibrium was at PQ, but after the intervention it creates a disequilibrium. Supply is a Q1 but demand is at Q2. This means that there is more people willing to purchase at that price than there are firms willing to supply, so there is likely to be a shortage.

Positives

• More affordable to LIC
• Ensure affordability of necessity

Negatives

• Creates disequilibrium
• Excess demand
• Firms leave the market
• Lack of investment

Examples

• Energy market (Gas & electric)
• Water
• Rental