Answer to Question #209178 in Microeconomics for nosi

Question

Name FOUR reasons why governments often set maximum prices

Answer 1

Governments set maximum prices to offer control over sellers towards exploitation of the consumer. It set the maximum price for the following reasons;

1. limit monopoly exploitation. Monopoly is the price maker and without regulation from the government, they can charge any price as high as possible.
2. If the good is an essential good for daily living like water or salt then government imposes maximum price to ensure poor people can afford it.
3. If the good has an inelastic supply, the government sets the maximum price to ensure that there is no reduction of supply of the good.
4. For purposes of resource allocation to ensure a balanced economy because if the price of a good is too high then investors will flood the market and forget about the other areas of the economy for example real estate.