Discuss whether the introduction of maximum prices by a government would solve the problem of scarcity.
Discuss whether the introduction of maximum prices by a government would solve the problem of scarcity.
Introduction
Maximum price is the highest possible cost of a good or a service that is legally allowed. While an unregulated market usually does not have a maximum price besides what consumers are willing to pay, during certain times, the government would step in to assert some price control so that consumers within the country will not be affected that badly by inflation. (BusinessDictionary.com, 1999)
How Does Maximum Prices Affect A Country?
While setting a maximum price would ensure that all citizens of the country would be able to afford products, setting a price ceiling would shift the price equilibrium causing a few things to happen. Existing producers will realise that it is not profitable top continue operations in the market as there will be no competition for the pricing of products and thus exit the market. Also, prospective producers will not dare to enter the market due to fearing for their own losses. Lastly, current producers will only produce at the levels where the price ceiling is equal to the supply and will not increase supply to meet demand as there is no incentive to do so. Leaving the problem of scarcity in the country to escalate further and not be of help to the country even if the government set maximum prices.
Shortage of Supply?
When the ceiling is set below the market price, there will be excess demand or a supply shortage. Producers will not produce as much at a lower price, while consumers will demand more because the goods are cheaper. Soon, demand will outstrip supply, in which there will be a lot of people who want to buy at the lower price but cannot. Still, if the demand curve is relatively elastic, then the net effect to consumer surplus will be positive. Producers are truly harmed as their surplus is doubly hit with a reduction in the number of firms willing to take that lower price, and those who remain the
Introduction
Maximum price is the highest possible cost of a good or a service that is legally allowed. While an unregulated market usually does not have a maximum price besides what consumers are willing to pay, during certain times, the government would step in to assert some price control so that consumers within the country will not be affected that badly by inflation. (BusinessDictionary.com, 1999)
How Does Maximum Prices Affect A Country?
While setting a maximum price would ensure that all citizens of the country would be able to afford products, setting a price ceiling would shift the price equilibrium causing a few things to happen. Existing producers will realise that it is not profitable top continue operations in the market as there will be no competition for the pricing of products and thus exit the market. Also, prospective producers will not dare to enter the market due to fearing for their own losses. Lastly, current producers will only produce at the levels where the price ceiling is equal to the supply and will not increase supply to meet demand as there is no incentive to do so. Leaving the problem of scarcity in the country to escalate further and not be of help to the country even if the government set maximum prices.
Shortage of Supply?
When the ceiling is set below the market price, there will be excess demand or a supply shortage. Producers will not produce as much at a lower price, while consumers will demand more because the goods are cheaper. Soon, demand will outstrip supply, in which there will be a lot of people who want to buy at the lower price but cannot. Still, if the demand curve is relatively elastic, then the net effect to consumer surplus will be positive. Producers are truly harmed as their surplus is doubly hit with a reduction in the number of firms willing to take that lower price, and those who remain the
References: Anon., 2013. Monetary Policy Operations in Singapore. [Online] Available at: http://www.sgs.gov.sg/~/media/2013-03-13%20Monetary%20Policy%20Operations%20Monograph.pdf BusinessDictionary.com, 1999. What is Maximum Price. [Online] Available at: http://www.businessdictionary.com/definition/maximum-price.html EconPort, 2006. Price Floors and Ceilings. [Online] Available at: http://www.econport.org/content/handbook/Equilibrium/Price-Controls.html Monetary Authority of Singapore, 2013. The Singapore Economy. [Online] Available at: http://www.sgs.gov.sg/en/The-SGS-Market/The-Singapore-Economy.aspx Singapore Government Securities, 2013. Fiscal Policy. [Online] Available at: http://www.sgs.gov.sg/The-SGS-Market/Fiscal-Policy.aspx Wessels, W. J., 2006. Scarcity. In: Economics. 4th ed. London: Barron 's Educational Series, pp. 232-233.