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 don’t 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 Q_d – Q_s.  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 legally.

·        Reduces the supply of already scarce products.