(a) Define maximum price legislation.
(b) Explain any three reasons for fixing price floors on agricultural produce.
(c) Outline any three effects of price ceiling.
Explanation
(a) Maximum price legislation is a policy of fixing the price of a product below its equilibrium price by the government, above which it is illegal to sell the product.
(b)(i) To enhance stability of farmers’ incomes in times of bumper harvest.
(ii) To encourage a steady flow of agricultural output at stable prices.
(iii) To stabilize the amount of incomes households spend on food, making it possible for households to plan their expenditure on
(iv) To prevent exploitation of farmers by middlemen who may want to pay lower prices for their produce.
(v) To reduce the risks associated with price fluctuations of agricultural produce.
(c)(i) Fixing price below equilibrium may lead to excess demand. This creates shortage of the product.
(ii) Parallel/illegal/black markets may develop and some products may disappear from the regular markets to be sold in illegal markets at prices far above the equilibrium price.
(iii) Shortage of products may lead to rationing. This may place a limit on the quantity of products consumers can buy.
(iv) Conditional sales will emerge where buyers may be required to fulfill certain conditions before purchases can be made.
(v) Queues will develop since the commodities are hard to come by.
(vi) Distortions in production may result as only products whose prices are not controlled will be produced.
(vii) Preferential sales will emerge as sellers will sell to whom they know.
(viii) Hoarding of goods will become prevalent.
(ix) Goods will be smuggled to areas/places with higher prices.
(x) Loss of profit for producers will lead to a reduction in the quality of the products.