Creates a dead weight loss.
Effect of price floor on consumer surplus.
The effect of a price floor on consumers is more straightforward.
Producers may be better off no different or worse off as a result of the measure.
The result is a surplus of the good due to unsold goods.
Typically producers are better off.
However price floor has some adverse effects on the market.
When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.
They may be worse off or no different.
Effects of price floors.
This has the effect of binding that good s market.
Supply and demand analysis.
To understand how the price floors work you should have an understanding of the following.
Consumer surplus will only increase as long as the benefit from the lower price exceeds the costs from the resulting shortage.
Further the effect of mandating a higher price transfers some of the consumer surplus to producer surplus while creating a deadweight loss as the price moves upward from the equilibrium price.
But if price floor is set above market equilibrium price immediate supply surplus can be observed.
Raises the price of good to the mandated price.
Reasons for setting up price floors.
The total economic surplus equals the sum of the consumer and producer surpluses.
If price floor is less than market equilibrium price then it has no impact on the economy.
A price floor may lead to market failure if the market is not able to allocate scarce resources in an efficient manner.
Reduces the quantity produced and consumed.
If the price floor was set above the equilibrium.
The effect of a price floor on producers is ambiguous.
When government laws regulate prices instead of letting market forces determine prices it is known as price control.
Consumer and producer surplus.
Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price.
Consumers are made worse off.
Price floors prevent a price from falling below a certain level.
If the price floor was set below the equilibrium price then the removal of this price floor would have no effect on producer and consumer surplus.
