(a) Define maximum price legislation. (b) Explain any three reasons for fixing price floors on agricultural produce. (c) Outline any three effects of price ...

Answer Details

(a) Maximum price legislation (a price ceiling) is a law that fixes a price above which a commodity may not legally be sold. It is set below the equilibrium price to protect consumers from high prices, for example a rent or a price control on essential foodstuffs.

(b) Three reasons for fixing price floors (minimum prices) on agricultural produce:

• To guarantee farmers a fair, stable income and protect them from ruinously low prices.
• To encourage greater production by assuring farmers that their output will fetch a worthwhile price.
• To cushion farmers against price fluctuations caused by bumper harvests or gluts, which would otherwise push prices very low.

(c) Three effects of a price ceiling:

• Excess demand (shortage): because the fixed price is below equilibrium, quantity demanded exceeds quantity supplied.
• Emergence of a black market: scarce goods are diverted and sold illegally above the controlled price.
• Rationing and hoarding: government may have to ration the scarce goods, and sellers may hoard them, creating queues and favouritism.