Another method of price intervention available to governments to address market failure, price caps are often controversial. Recent examples include: mobile roaming charges in the EU, payday loans, pharmaceuticals and (often discussed) rent controls.
You need to be able to evaluate the arguments for and against this method and show that you understand the potential problems that they may face.
Take a look at these resources and articles:
Tutor2U summary: https://www.slideshare.net/mobile/tutor2u/tutor2u-government-intervention-maximum-prices
Payday loans: http://www.tutor2u.net/economics/blog/price-cap-introduced-for-the-uk-payday-loans-market
Housing rents: http://www.theguardian.com/money/2015/nov/17/generation-rent-young-adults-housing-ladder-2025
Housing rents: http://www.theguardian.com/world/2016/mar/14/young-families-priced-out-rental-markets-in-two-thirds-uk
Assessing Price Caps
It’s not just taxes that affect prices. The UK has long debated imposing a minumum price for alcohol. The articles below give an excellent overview of the issues in this context.
Consider these questions:
- Explain the market failure here. What evidence can you use to support your view?
- Can you draw a diagram to represent the market failure?
- How would a minimum price work? Draw a diagram to illustrate the theory.
- What are the limitations of this method of price intervention?
- Are there alternatives or complementary strategies that could be used?
Some further reading:
Guide to Units:
Have you stopped using as many plastic bags? How about this as a topical example of the power of taxation..?
Activity: Calculate the PED for plastic bags from the information in the case study.
Extension: Demonstrate the impact of the plastic bag tax on demand for plastic bags using a market diagram.