Price Floor Effect Producer Surplus

The total economic surplus equals the sum of the consumer and producer surpluses.

Price floor effect producer surplus.

They may be worse off or no different. A deadweight welfare loss occurs whenever there is a difference between the price the marginal demander is willing to pay and the equilibrium price. The effect of a price floor on consumers is more straightforward. Price floors cause a deadweight welfare loss.

Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium. It ensures prices stay high causing a surplus in the market. Suppliers can be worse off. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price.

In case of producer surplus producers would have reduced the price to increase consumers demands and clear off the stock. Consumers never gain from the measure. In this case the price floor has a measurable impact on the market. Producers may be better off no different or worse off as a result of the measure.

When government laws regulate prices instead of letting market forces determine prices it is known as price control. This mutual adjustment continues until the price reaches p where producer and consumer decisions are perfectly coordinated. In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium. But since it is illegal to do so producers cannot do anything.

So government has to intervene and buy the surplus inventories. The effect of a price floor on producers is ambiguous. 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. The result is that the quantity supplied qs far exceeds the quantity demanded qd which leads to a surplus of the product in the market.

A mandated minimum price for a product in a market. The deadweight welfare loss is the loss of consumer and producer surplus. In effect the price floor causes the area h to be transferred from consumer to producer surplus but also causes a deadweight loss of j k. By contrast in the second graph the dashed green line represents a price floor set above the free market price.

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. An effective binding price floor causing a surplus supply exceeds demand.