hi everyone let's now look at a maximum price and the impact a maximum price can have on a market and how it can affect key stakeholders in the market what is the maximum price well again it's a price control fixing the price done by the government normally below the equilibrium it could be above but usually below the equilibrium to basically support consumers so if governments feel that the price for a good or service is too high they can fix the maximum price below the equilibrium to ensure that consumers can actually afford it um we call maximum prices price seedings because the price can't go above that is the stealing price the maximum price that can be charged so let's have a look at the market let's take rented accommodation as our example we have here the market for rented accommodation and this is a common market where maximum prices are actually imposed so let say governments think that P1 in the free market is too high and they decide M let's set a maximum price which lowers the price in the market to this level okay so maybe that is the maximum price for rented accommodation call P Max right and that is the max price now let's analyze the effects of that in the market well obviously demand is going to extend with a lower price so consumers like it that's the intention so demand extends to Q2 Supply contract suppliers of rental accommodation do not like it they don't like the fact that they are only getting a lower price now a much lower price so they contract their supply to Q3 straight away you'll see in the market demand is higher in Supply shading the triangle down below that gives us a value of the excess demand so I'll call that a I'll call that b so there we have we have excess demand and the problem is because you've imposed a maximum price there is no way for the free market to ration that acccess demand usually in the free market um signals will be sent to producers that the price is too low the incentive will then be to raise the price contract your demand ration the excess demand and get to the um market equilibrium the market clearing price however with the maximum price we stuck with this excess demand and that needs to be dealt with somehow and if we don't deal with it the only way to ration It Is by queuing or allowing a black market to exist where uh illegal Traders can exploit the fact that there are consumers that are willing to pay a higher price maybe lower than equilibrium price there's still higher price than the maximum price and they can start trading illegally trying to ration the demand themselves anyway let's look at the impact on stakeholders now so the government has got a problem here the government has actually imposed a price control that's caused an excess demand problem that needs to be dealt with and the way they can deal with it is by trying to increase Supply to cut demand at point B basically if they can intervene and do that then that will mean that Q2 units are actually produced and sold and that will be an efficient outcome for all instead of only Q3 units being produced and uh and actually sold so they could do that how could they do that well they could actually subsidize um producers of rented accommodation and that will reduce their cost of producing it will incentivize them to increase the amount of output they produce the amount of output that they actually sell on to Consumers but the problem with that is that it's very expensive so governments need to to deal with excess demand okay and one way to do it is by shifting supply to the right somehow okay or shifting Supply back to point B if they use a subsidy then the supply will sh downwards to point B and that could work but the problem with doing that and imposing a subsidy is there is a huge opportunity cost so if the government decides to subsidize could that money have best been spell elsewhere in the economy we education maybe on Healthcare maybe on infrastructure development maybe there were better uses of that money instead of trying to solve a problem that the government has caused itself right at the same time has that money been taken away from somewhere if subsidies have been placed right and if the government does subsidize will taxes have to rise in the future to fund the subsidy there are major opportunity cost issues that the government has to deal with the government also has to bear in mind the potential issues of black market now that can actually cause government failure if the government is not careful and if we if I give you examples of where maximum prices have been used yes rent controls have been used especially in uh big cities like New York in London uh rent controls have been seen in the form of Maximum prices the problems that have been caused by that are massive waiting lists huge cues of people that are desperate to rent and get rented accommodation but in someone like Venezuela maximum prices have been used for for food your basic staple food items have all got maximum prices on them and all that's meant is that consumers flock to buy all these goods and services at low price and they empty the shelves of supermarkets and all we see then are massive amounts of queuing massive amounts of uh Rush buying and huge black markets lots of food smuggling from across the border to try and manipulate the fact that there is an excess demand in there so there potential for black markets to exist um is not good for the government it can lead to government failure uh the government now needs to spend money to regulate and enforce policing to deal with potential black markets and if they don't there could well be a greater misallocation resources a bigger market failure um so that's not good so the government must also bear that in mind uh and realize that black markets could well form as a result of a maximum price uh producers don't like this for two reasons they suffer from lower prices and they produce less lower quantities and the fact that they produce less may also feed through into jobs lower prices means lower revenues lower profits lower incomes not good for them lower quantities again implies that they have to cut back on jobs and that can have a negative effect in the economy although if the government does subsidize if they manage to find a way to increase Supply to get to Q2 then fair enough that uh argument May well be limited consumers like this yeah so consumers like the fact there were lower prices right so consumers are happy about that the fact they lower prices but they're not going to be so happy if they can't actually buy whatever it is at this lower price because there is enough available so the excess demand problem May well negate some of the benefits of lower prices however once again if the government is successful in increasing Supply they may benefit from lower prices and still consume at a given quantity um uh however there is another way governments can deal with this instead of increasing Supply they might to try and reduce demand uh instead to get to an efficient level but again that kind of goes against the idea here if you try and reduce demand what's the point you're restricting consumption when you're trying to encourage it so it's unlikely that's going to happen but if governments are that stupid and they decide to reduce demand consumers will not be happy with it but on a very simple level consumers do benefit from lower prices and it does encourage consumption of goods and services that maybe consumers before we're not able to afford and finally we'll finish by saying that a maximum price also imposes a dead weight loss on society just like a minimum price did and the dead weight loss is this triangle here if you want to understand why this dead weight loss is caused watch my video on why a maximum price causes a dead weight loss I'll go through in detail but if you draw a minimum price diagram like this analyze it like this with the dead weight loss to society you will score massive marks so stick this on you will score if you want to understand it watch the video on why deadweight loss is caused all right that's it for maximum PR thanks so much for watching see you next time