To what extent is the price mechanism important

Information sheet on government intervention in the market

Definitions of minimum and maximum prices

Pricing

For many goods, pricing does not take place under the conditions of the free market, but is influenced by the state. This intervention by the state in a social market economy serves to protect buyers and / or suppliers and ensures that the market price, which cannot be "fair" or "social", becomes "fair" and "social". Would z. If, for example, a price for a vital drug could be established that poorer consumers could not pay, that would be reason enough to regulate the market.
The state can intervene indirectly or directly in price formation and thus in market developments.

  1. Indirect interventions
    Indirect interventions do not override the price mechanism and are therefore referred to as being in line with the market. Here, the state increases / decreases the demand and / or the supply and the price formation is still left to the market. The state can thus prevent a possible fall or rise in prices. Indirect interventions can either be price measures such as B. import duties, subsidies, tax measures or quantitative measures such. B. Import restrictions.
  2. Direct interventions
    Direct interventions by the state are inconsistent with the market, i. H. they contradict the system of the free market economy. Here the state intervenes directly in pricing by making regulations on pricing in the form of fixed minimum or maximum prices. He thereby sets the free market mechanisms, i. This means that the price is determined by supply and demand, and the price functions are ineffective.

Minimum prices

Minimum prices are a lower price limit set by the state for goods, i. H. the price must not fall below this value. The equilibrium price (the point at which the demand function intersects with the supply function - all providers who are willing to sell at equilibrium price can sell all of their goods; all consumers who are willing to buy at equilibrium price can buy their maximum quantity) for 250 g butter z. B. amount to EUR 0.65. The state minimum price is z. B. 0.89 euros, d. H. the customer has to pay at least EUR 0.89 for 250 g butter. The minimum price is always above the equilibrium price that would be formed by supply and demand. Such state minimum prices are mainly found in agriculture.

State-guaranteed minimum prices are always set when it is feared that competition in the market will lead to ruinous competition among the providers. Every provider would try to undercut the competition with its prices. That would e.g. B. in the field of agriculture at the expense of small family businesses, which would ultimately be driven out of the market. The minimum prices protect the providers and thus ensure their existence.
It should be noted critically here that the minimum price guaranteed by the state almost always means that more goods are offered than are in demand. The production of such goods is very lucrative and therefore risk-free due to the guaranteed high prices. The surplus production is bought up and stored by the state. The high stocks, such as mountains of butter or milk lakes, are then sold abroad at low prices or processed into goods of lower value (butter to grease).

Maximum prices

Maximum prices are an upper price limit set by the state for certain goods. The equilibrium price for 1 square meter rental in Frankfurt is 15.00 euros. By setting the price for 1 square meter at 9.00 euros in social housing, the state determines what a square meter may cost at most. This maximum price must not be exceeded, it is always below the equilibrium price. In this case, free pricing would always result in a higher price.

State-guaranteed maximum prices serve to protect consumers. The price can no longer rise due to competition from customers. Maximum prices are intended to ensure that in the social market economy, lower-income groups of the population also have access to e.g. B. have apartments.
However, a constant excess demand can lead to insufficient coverage of demand, i. H. the supply is less than the demand and thus a black market can arise. There is no longer any incentive for providers to provide living space.
State intervention in the pricing process can be very popular politically and is therefore repeatedly used as election campaign topics. A special topic in recent years has been the area of ​​subsidies and the associated protection of the domestic economy.

References:
Source: Geography Information Center
Author: Anke Renker
Publisher: Klett
Location: Leipzig
Source date: 2004
Page: www.klett.de
Processing date: May 2nd, 2012


Keywords:
Minimum price, maximum price


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