Maximum Prices - 2021 Revision Update

In this revision resource we apply, analyse and evaluate the use of maximum prices in markets.

In this revision update video we look at six examples of where maximum prices or price caps might or could be introduced as a form of government intervention.

What is a maximum price in a market?

This is a legally imposed maximum price (or price ceiling) in a market that suppliers cannot exceed. A maximum price is introduced to prevent prices from rising above a certain level / threshold.

A key aim of a price control is to improve affordability of a good or service to consumers, especially those on lower incomes.

Examples of actual or possible maximum price controls

Housing rents: In November 2020, voters in Portland, Oregon in the United States voted to introduce a system of rent controls.

Energy prices: There is an energy price cap in the UK. The cap limit how much suppliers can charge for each unit of gas and electricity for standard variable tariffs and pre-payment meters.

Salary caps in sport: In August 2020, 'Squad Salary Caps’ were introduced in EFL League One and League Two. The agreed fixed caps were £2.5 million and £1.5 million, respectively.

Executive pay caps: In 2019, FTSE 100 CEOs took home a median pay package worth £3.61m, which is 119 times greater than the median earnings of a UK full-time worker (£30,353)

Capping fees charged on claims management: Currently some customers pay fees of more than 40 per cent of the compensation they receive but under a proposed cap, CMCs could not charge more than 15-30%.

Payday loans market: Interest and fees on payday loans have been capped at 0.8 percent per day. The total cost of the loan can not be more than 100% of the original charge.

In this video we work through the basic analysis of how a maximum price such as rent controls might work in a market.