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Maximum price scheme

A scheme imposed by government regulation which prevents prices rising above a certain level. Maximum prices are normally set at a level below current equilibrium price.

Below is a diagram to illustrate a successful intervention from the government to impose a maximum price in a market. Because the price is positioned below the current market price it creates an artificial excess demand. But unlike in ordinary markets, market forces do not ensure that this disequilibrium is cancelled out because the price cannot rise to a higher level above the maximum price. As a result this excess demand is left unsatisfied and increases the probability of black marketsopening up to satisfy this unmet demand.


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