Maximum price – definition

A maximum price is a limit or cap on a price set by a government or an organisation – it is the highest price that can be set by a producer, group of producers or a whole industry. A price below the maximum  is acceptable, and no intervention would follow.

maximum price diagram

A maximum price might be considered as providing a benefit to consumers, and while the price is capped below the market equilibrium it has the effect of contracting supply, and extending demand, and thus creates a shortage. This is considered to be the main argument regarding setting maximum prices. At the maximum price there will be a welfare loss, as shown by the area a,b,c.
Welfare loss of a maximum price