Price Floors Eventually Create A Surplus

Price floor is enforced with an only intention of assisting producers.

Price floors eventually create a surplus.

This analysis shows that a price ceiling like a law establishing rent controls will transfer some producer surplus to consumers which helps to explain why consumers often favor them. Efficiency and price floors and ceilings. A price floor is the lowest legal price a commodity can be sold at. Suppliers can be worse off.

The most common price floor is the minimum wage the minimum price that can be payed for labor. Price floors cause surpluses. Another good example to explain a price floor would be the agriculture market. It is an implicit tax on producers and an implicit subsidy to consumers.

A consumer surplus occurs when the price for a product or service is lower than the highest price a consumer would willingly pay. Price ceiling a price ceiling is a government set price below market equilibrium price. They are forced to pay higher prices and consume smaller quantities than they would with free market. If price floor is less than market equilibrium price then it has no impact on the economy.

A price floor could be set at p4 causing a surplus of q3 q0. The original consumer surplus is g h j and producer surplus is i k. Quantity demanded will increase and quantity supplied will decrease. Do these create shortages or surpluses.

The current equilibrium is 8 per movie ticket with 1 800 people attending movies. Consumers are clearly made worse off by price floors. Think of an auction where a buyer holds in his mind a price limit. The price floors are established through minimum wage laws which set a lower limit for wages.

But the price floor p f blocks that communication between suppliers and consumers preventing them from responding to the surplus in a mutually appropriate way. Price floors transfer consumer surplus to producers. When the government removes a binding price floor. Price floors are used by the government to prevent prices from being too low.

Figure 2 b shows a price floor example using a string of struggling movie theaters all in the same city. Government set price floor when it believes that the producers are receiving unfair amount. Remember hearing stories about the government paying farmers to not grow crops. However price floor has some adverse effects on the market.

A surplus occurs when there is more of a supply of a good than is demanded by consumers. This happens when government puts into place a price floor. The net effect of the price floor in the above activity is that the price floor causes the area h to be transferred from consumer to producer surplus but also causes a deadweight loss of j k.