▷ Maximum price fixation

An important factor in the economy, without a doubt, is the maximum pricing as well as minimums to guarantee the welfare of society; through the implementation of government economic policiesas measures to controlprices when the prices of goods and services in the market are considered unfair.

However, they are measures that must be studied and planned with great caution so as not to cause adverse effects. unforeseen negative distortions in the economy, generating more inequalities than intended remove.

Now, the plans to establish a maximum price, stems from the need to “prevent the cost of living from increasing,” since the existing price in the market at the time of the intervention is not reasonable; therefore, an intervention is carried out to establish a ceiling price.

What is the maximum price or ceiling price?

The maximum price is rate imposed by the state as a price cap for certain goods and services; generally for essential goods and services.

With these economic measures, governments They want the population In general, regardless of their social status, have the purchasing power to access such regulated goods and services, being the maximum price a measure to curb excessive increases in the sale price.

These price increases in the market are generated when the demand level exceeds the supply; that is, that the goods or services in question are consumed at a faster rate than the proportion with the that are produced, making it necessary to implement economic police to establish prices maximums.

Why is the maximum price regulated?

The reasons to regulate prices depends on existing market conditions, because in theory, when perfect competition is generated in the market, the same offer and demand generate an acceptable price for both parties; in these cases there are no valid reasons to establish price regulation policies.

However, in cases where imperfect competition is generated in the market, such as monopoly markets or there is any other external factor that alters prices, generating failures in the market; the implementation of policies or intervention mechanisms is justified by the state.

Therefore, economists consider these measures acceptable when market failures are generated, since in these cases some of the economic agents have the power to influence the price in their favor.

For example, monopoly or oligopoly firms tend to influence the price in their favor, generating an unfair price for the buyer, since they are the ones who dominate the market with little or no competition; In these cases, state price regulation measures are applied, establishing a maximum retail price.

Negative effects of maximum price regulation

Although these measures seek to protect the common citizen or final consumer, they also trigger a series of negative effects that should be studied in advance to prevent the consequences of the measures from being more serious than the problem they are intended to solve.

Since, isimpossible to maintain the price of regulated goods or services below their market value, without simultaneously producing consequences.

Firstly, because it generates a increase in demand of the intervened product or service, since, by establishing a cheaper price, people will want to consume more by purchasing larger quantities.

Next, generate a supply reduction, then, as consumption increases, stocks in the market are depleted more quickly.

Third, generate a contraction in the level of production, because for many production companies the profit margins are limited and even become zero, basically being forced to produce at cost; which leads to Many companies disappear or change their economic activity.

Basically, as a minimum consequence, when setting a maximum price, scarcity is generated; consequence that the governments want to avoid, because, on the contrary, the governments seek to increase the offer in them to ensure the quality of life of the population.

In addition, many companies, seeing themselves subject to price regulations by the state, opt for migrate their investments or production to other sectors where prices are established by the free market; what causes a economic stagnation of the regulated sector.

Therefore, there are many factors or variables to take into account, being a measure that, although it allows establishing an accessible price for the population in general; if corrective measures are not established to mitigate the negative effects, the consequences can be greater.

Examples of maximum pricing

1. With the effects produced by the Covid-19 pandemic, there was a considerable increase in the demand for virus detection tests; therefore, many governments established maximum prices for these products, the Chilean government, for example, established in 2020 a Maximum price for Covid-19 virus detection tests of $25,000.
2. Thegovernment Mexico, for example, set in July 2021 maximum prices for liquefied petroleum gas for six months as a measure to ensure access to gas supply for the entire population in the face of market price increases; measure that was extended in January 2022 for six more months.
3. In Venezuela, for example, due to the hyperinflationary situation in the country, the government has increased maximum price regulation policies for basic necessities, a situation that has generated the financial bankruptcy of numerous companies.

Maximum pricing practical exercise

The intervention of the state when establishing a maximum sale price causes that, since the fixed price is inferring the equilibrium price in the market, the plaintiff wants to consume more units; but the bidder will want to offer fewer units at that regulated price.

Of course, this generates demand access and with it scarcity, a situation that cannot be sustainable in the long term, graphically it is represented as follows:

• Graphic representation: