he price mechanism, all be it for valid reasons.1) If government sets a minimum price above the equilibrium, there will be a surplus. Price will not be allowed to fall to eliminate this surplus. They would do this to protect producers incomes. If the industry is subject to supply fluctuations (e.g. crops, due to fluctuations in weather) and if industry demand is price inelastic, prices are likely to fluctuate severely. Minimum prices will prevent the fall in producer's incomes that would accompany periods of low prices.Minimum Price: price floorThe government can use various methods to deal with surpluses associated with minimum prices. The government could buy the surplus and store it, destroy it, or sell it abroad in other markets. Restricting products to a particular quota could artificially lower supply. Demand could be raised buy advertising, or by creating alternative uses for the good2) If the government sets a maximum price below the equilibrium there will be a shortage. Price will not be allowed to rise to eliminate this shortage. They would do this to create a surplus (e.g. grains) particularly in periods of glut-, which can be stored for possible future shortages.Maximum price: price ceilingThis would normally be done for reasons of fairness. In wartime, or times of famine, the government may set maximum prices for basic goods so that poor people can afford to buy them. This may however lead to the emergence of black markets, as people are unable to get enough of what they want through the legal markets.The also government intervenes to stop monopolies in the market place. If it were not to do this it would allow the creation of huge international companies which would have the power to dominate the market and control prices. If this were allowed to happen it would kill of the principle of the price mechanism as companies would stop striving for efficiency, as there would be no need, as they would have no competition.The gove...
