Maximum prices

Maximum Prices

1. Maximum'Prices'
EdExcel'Economics'1.4.1'

2. Maximum'Prices'/'Price'Caps'–'Some'Topical'Issues'
Housing'Rent'
Controls'
Energy'Price'Caps'
to'control'fuel'bills'
Caps'on'CEO'Pay'/
Bonuses'
Cap'on'Mobile'
Roaming'Charges'
Price'capping'for'
water'companies'
Cap'on'interest'
rates'charged'by'
payCday'lenders'
Cap'on'annual'
charges'to'
occupaDonal'
pension'plans'
Currency'peg'e.g.'
Hong'Kong'/'US'
dollar'
The'government'or'an'industry'regulator'can'set'a'maximum'price'
to'prevent'the'market'price'from'rising'above'a'certain'level'

3. Maximum'Price'Analysis'Diagram'
QuanDty'supplied'
P1'
Q1'
A'maximum'price'must'be'set'below'the'normal'free'market'
equilibrium'price'to'have'any'effect'on'price'and'output'
Market'
Demand'
Max'Price'
Q2'
Price'
Q3'
Market'
Supply'
Max'Price'(price'ceiling)'
Free'Market'
Equilibrium'
An'alternaDve'to'a'
maximum'rent'is'a'rent'
subsidy'for'housing'which'
is'the'equivalent'of'an'
increase'in'income'

4. Maximum'Price'Analysis'–'“Black'Market”'Prices'
QuanDty'supplied'
P1'
Q1'
If'quanDty'is'restricted'to'Q3,'then'some'consumers'will'be'
willing'to'pay'a'higher'“unofficial'price”'at'P2'
Producers'can'extract'extra'consumer'surplus'at'higher'price'
Market'
Demand'
Max'Price'
Q2'
Price'
Q3'
Max'Price'
P2'
Market'
Supply'
Extracted'
consumer'
surplus'above'
the'official'
price'ceiling'
Possible'unofficial'
price'above'the'ceiling'
Some'
raDoning'or'
aucDon'
process'may'
be'needed'if'
output'='Q3'

5. Applied'Micro:'Plans'for'an'Energy'Price'Cap'
Output'
of'gas'
P1'
Q1'
D'
Max'
Price'
Price'
of'gas'
Q3'
S'
In'2013,'exCLabour'Leader'Ed'Milliband,'announced'that'he'would'
consider'capping'fuel'prices'if'elected'into'Government'in'2015'
• Milliband'argued'that'rising'fuel'
prices'benefit'only'the'privatelyC
owned'firms'that'sell'the'fuel.'
• These'firms'benefit'unfairly'
because'there'is'limited'
compeDDon'in'the'fuel'
generaDon'and'retail'markets.'
• Because'demand'for'fuel'is'price'
inelasDc,'an'increase'in'fuel'bills'
reduces'people’s'real'
purchasing'power'
• The'main'case'for'the'energy'
price'cap'proposal'is'to'increase'
fairness'for'families'on'low'
incomes'
Opponents'of'a'price'
cap'argue'that'more'
compeDDon'is'a'
beaer'longCterm'
strategy'to'lower'
prices'

6. EvaluaGng'Price'Caps'in'Different'Markets'
A'maximum'price'also'involves'a'normaGve'judgement'on'behalf'of'
the'government'about'what'that'price'should'be'
Benefits'
• A'useful'surrogate'
for'compeDDon'
• Holds'prices'down'
–'consumer'
welfare'gains'
• IncenDves'for'
businesses'to'cut'
costs'to'maintain'
profits'
Downsides'
• Reduces'profits'–'
less'money'for'
capital'investment'
• May'dissuade'new'
entrants'
• Firms'might'raise'
prices'in'other'
ways'
AlternaGves'
• Measures'to'
reduce'entry'
barriers'in'an'
industry'
• Higher'taxes'on'
monopoly'profits'
e.g.'a'windfall'tax'

7. Maximum'Prices'
EdExcel'Economics'1.4.1'