A maximum price is a price ceiling set by the
government where the price is not allowed to rise above this set level
(although it is allowed to fall below).
The reason for setting a maximum price is so that the
prices of necessities dont rise too much in times of shortage.
Such a situation is common in times of war and/or famine.
The maximum price has caused a shortage (excess
demand) equal to Qd Qs.
The government can deal with this in two ways:
First come first serve this is the situation in a lot of
eastern European countries and means that huge queues are common.
Rationing Purchases are limited by the number of coupons or
vouchers issued. Such as was
seen during WWII.
Encouraging more homegrown production as seen in WWII.
Drawing on stores from previous surpluses.
Problems with maximum prices include:
Black markets Selling of rationed goods illegally at very
high prices to consumers who feel that they are not able to purchase enough
Reduces the supply of already scarce products.