A maximum price is set by the government below the existing free market equilibrium price & sellers cannot legally sell the good/service at a higher price
Governments will often use maximum prices in order to help consumers. Sometimes they are used for long periods of time e.g. housing rental markets. Other times they are short-term solutions to unusual price increases e.g. petrol
Diagram Analysis
The initial market equilibrium is at PeQe
A maximum price is imposed at Pmax
The lower price reduces the incentive to supply & there is a contraction in QS from Qe → Qs
The lower price increases the incentive to consume & there is an extension in QD from Qe → Qd
This creates a condition of excess demand QsQd
Advantages
Some consumers benefit as they purchase at lower prices
They can stabilize markets in the short-term during periods of intense disruption e.g. Covid supplies at the start of the pandemic
Disadvantages
Some consumers are unable to purchase due to the shortage
The unmet demand usually encourages the creation of illegal markets (black/grey markets) as desperate buyers turn to illegal bidding
Maximum prices distort market forces & therefore can result in an inefficient allocation of scarce resources e.g. maximum prices in rentals in the property market create a shortage