Cambridge International as and a level Economics Ebook

minimum price
 
control in a market. Th
is acts as a price 
fl oor. Th
ese cases are not as common as where maximum 
price control is imposed. Controls are only valid in 
markets where the minimum price is set 
above
the normal 
equilibrium price. Governments use legislation to enforce 
minimum prices for:
■
demerit goods such as tobacco products and alcohol
■
wages in certain occupations, usually low skilled, to avoid 
exploitation by employers
■
certain types of imported goods where domestically 
produced close substitutes are available.
Figure 3.2
indicates that at the minimum price, suppliers 
are willing to supply considerably more products than are 
demanded by consumers. As price cannot fall, supply is 
restricted to 
Q
1
– this is all consumers can aff ord to buy. 
A lower quantity is traded than would have occurred at 
the equilibrium price. It is also the case that producers 
are likely to be ineffi
cient; fi rms with high costs have little 
incentive to reduce these costs since the high minimum 
price protects them from lower-cost competitors. As with 
maximum price control, there is a danger that an informal 
market will develop especially for sought-aft er products 
like imported alcohol and cigarettes. Consumers will be 
more than happy to buy from dealers off ering these goods 
at less than the regulated minimum price.
TOP TIP
To be eff ective, a maximum price must always be fixed 
below the equilibrium price; a minimum price must 
always be fixed above the equilibrium price.
Regulation and equity: 
Maximum prices interfere with 
the unregulated market mechanism largely for reasons of 
social equity. The prices of essential items are capped to 
help those who are on low incomes and this goes some 
way towards a more equal distribution of income. The 
trade-off is that the free market is distorted and may not 
bring the full benefits that might be expected.
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