# Maximum price

Maximum prices ( English cap prices ) are an instrument of state market regulation in the economy , where a certain price may not be exceeded, but may be undercut. Maximum prices apply as the state-set (administered) upper price limit . In contrast are the minimum prices .

## General

In market-based systems to market prices on free markets fluctuate indefinitely, because they are exclusively the market and price mechanisms of supply and demand and the free pricing subject. However, this can lead to market failure , which can also manifest itself in extremely high or extremely low prices. Economic policy can then initially take moral appeals or - in the event of non-compliance by market participants - also exceptionally legal or officially ordered measures through maximum or minimum prices. This is to system-retardant and non-market-based interventions in the market because maximum or minimum prices set free pricing suspended. The introduction of maximum prices serves to protect consumers, the setting of minimum prices serves to protect providers.

## history

There were already high prices in antiquity . In 301, Emperor Diocletian prescribed maximum prices for goods and services in his maximum price edict , which could be punished with the death penalty in the ultima ratio . In the Middle Ages , maximum prices were sometimes carved into church walls. In the shortages that were common at the time , it was a matter of course that the authorities set maximum prices for essential goods. The grain prices from England and Antwerp can be divided into three cycles with maximum prices in the years 1367, 1369/70 and 1374. At the beginning of 1415, the Constance city council felt compelled to set maximum prices for grain and bread that was not only baked in Constance itself, but also brought to the Constance market in carts and ships; then for beans, lentils, barley, onions, beets and white cabbage, and also for wines.

Maximilien de Robespierre , under pressure from the sans-culottes and to supply the army, introduced maximum prices for grain through the Maximum Law in May 1793 , followed by the “Great Maximum” ( French grande maximum ) in September 1793, which affected not only food but also wages and for its disregard the death penalty threatened.

In August 1914, the Reichstag also passed a “law on maximum prices” to prepare the economy for war. It authorized the authorities to set maximum prices for bulk goods and everyday items in order to prevent price increases that are not “justified by the nature of the circumstances”. It was only the administrative maximum prices that made a distinction between open and dammed (hidden) inflation necessary.

In the dirigism of socialism or the central administration economy , maximum prices are inherent in the system and omnipresent. They are aimed mainly at consumers protect themselves by the state in particular the price ceiling for basic needs ( food , housing rent , heating or public transport sets) or household items administratively to low-income segments of the population, the financial risk to diminish. In the former GDR it was state regulated that prices must not exceed a certain level. The subsidization of food, energy, rent and fares was seen as a counterpart to the capitalist wage-price spiral . In the GDR, for example, there were maximum prices for household electricity and gas until the fall of the Wall in March 1990, while the maximum prices for heating energy for household needs were valid until April 1991.

## functionality

If the supply is too short , the market prices rise so sharply that the goods or services offered become unaffordable for large groups of consumers. The high market prices thus favor the suppliers and disadvantage the customers. Market-related scarcity of supply (e.g. due to bad harvests , production bottlenecks , monopoly formation , even with natural monopoly ) or due to external events ( natural disasters , wars , oil price crises ) lead to significant price increases until the state intervenes through market regulation to prevent further price increases with the help of maximum prices . Maximum prices are introduced to prevent producer and / or factor rents or to redistribute them to consumers.

Maximum prices are below the equilibrium price , even below the production costs . This makes it unattractive for providers to increase their range of products; rather, a further supply shortage can be observed, which exacerbates the price situation. Because in the former GDR the apartment rents (maximum prices) were not enough to maintain the houses, the buildings fell into disrepair (supply shortage). Maximum prices prevent prices from rising to market equilibrium , while minimum prices prevent prices from falling to market equilibrium. Price freezes during inflation or hyperinflation have the character of maximum prices, although they mostly cover all goods or services (including wages due to a simultaneous wage freeze), while maximum prices only affect certain goods. During the price freeze, the scarcity relations usually shift, which is not reflected in the prices. Therefore, after the price freeze has expired, there are often drastic price changes due to pent-up inflation. ${\ displaystyle (q1)}$ ${\ displaystyle (p *, q *)}$

## species

In Germany there has been a state interest rate regulation since January 1937, which, with the help of the "Interest Ordinance ", prescribed maximum interest rates to the banks in the " Debit Interest Agreement ", which may not be exceeded in the lending business and which may be remunerated as a maximum in the " Credit Interest Agreement " in the deposit business , but may also be below. Debit and credit interest remained stable. This interest rate ordinance ended in April 1967. In monetary policy , the exchange rate ranges for foreign currencies introduced in July 1944 represent minimum or maximum prices that are maintained through the foreign exchange market intervention of the central banks . If a currency reaches the maximum price ("upper intervention point"), the affected central bank must intervene by selling foreign currency. Between 1948 and 1958 there was a maximum price for coal in order to stabilize the general price level , until September 1963 there was a maximum price for drinking milk . In 1950 the federal government issued legal norms, "Order PR No. 31/50 and PR No. 32/50" on maximum prices for copper and zinc.

The oil price crises after October 1973 and after January 1979 led to a drastic shortage and increase in the price of by- products such as petrol and heating oil , but the states concerned responded by restricting demand instead of setting maximum prices . The German Energy Security Act imposed a general driving ban on four car-free Sundays , beginning November 25, 1973, and introduced general speed limits for six months (100 km / h on motorways , otherwise 80 km / h).

The scarce living space repeatedly triggered fixed rental prices . The first state price control of the rent took place through the Reich Rent Law of March 1922, in October 1936 a rent freeze was imposed by the National Socialists and further rent authorities were set up. From August 1963, landlords in West Germany were allowed to "reasonably" increase their rent claims up to a maximum rate of 25 percent; from 1964 there were no longer any maximum limits for old building rents either. The Tenancy Law Amendment Act, known as the rent brake, has been in force since June 2015 , according to which the rent demanded in a so-called “tight housing market” may not exceed 10% of the local comparative rent ( Section 556d BGB ).

However, maximum prices can also be the result of a prohibited price cartel . Here, competitors make inadmissible price agreements with one another with the aim of not selling certain products above a maximum price.

## consequences

Maximum price regulations for individual essential goods are usually introduced if, in a shortage situation, a distribution of the existing goods among the customers with the help of the price and thus due to the limited solvency of the customers is perceived as unsatisfactory and unjust. Maximum prices aim to avoid socially or economically undesirable profits . Due to maximum prices, the producer surplus decreases compared to the market equilibrium , while the consumer surplus increases accordingly. The desired expansion of the offer is omitted for the maximum price. For example, the rent control makes for limited rental yield the housing unattractive, it creates a seller's market in which the bargaining power rests with the seller (lessor). Rationing is often associated with the introduction of maximum prices , purchase tickets are distributed, waiting lists or queues are the result. There is a surplus of demand, also because the production of the affected goods becomes unattractive for the suppliers and they therefore reduce their supply. Exceeding the maximum prices is often threatened with a fine, and ultimately a black market arises .

## Individual evidence

1. Bernhard Beck, Prosperity, Market and State: An Introduction to Economics , 2008, p. 119
2. Horst Callies, Study Book History , Volume 1, 2003, p. 296
3. Hartmut Boockmann, Introduction to the History of the Middle Ages , 2007, p. 58
4. ^ Wilhelm Abel, Structures and Crises of the Late Medieval Economy , 1980, p. 69
5. Helmut Maurer, Konstanz in the Middle Ages , Volume 2, 1989, p. 13
6. Ulfried Weißer, Success Model Social Market Economy , 2017, p. 283
7. Helmut Gröner / Erhard Kantzenbach / Otto G. Mayer, Economic Policy Problems of the Integration of the former GDR into the Federal Republic , 1991, p. 206
8. Ulfried Weißer, Success Model Social Market Economy , 2017, p. 283
9. Andreas Forner, Economics: Introduction to the Basics , 1992, p. 190
10. Uwe Andersen / Wichard Woyke (eds.), Concise Dictionary of the Political System of the Federal Republic of Germany , 2003, p. 163