Effect Of Price Floor On Consumer Surplus

Consumer and producer surplus.

Effect of price floor on consumer surplus.

The total economic surplus equals the sum of the consumer and producer surpluses. The government is inflating the price of the good for which they ve set a binding price floor which will cause at least some consumers to avoid paying that price. Producers may be better off no different or worse off as a result of the measure. 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. Effects of price floors. If the price floor was set above the equilibrium. But if price floor is set above market equilibrium price immediate supply surplus can be observed.

A price floor may lead to market failure if the market is not able to allocate scarce resources in an efficient manner. Creates a dead weight loss. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. If price floor is less than market equilibrium price then it has no impact on the economy.

However price floor has some adverse effects on the market. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. Consumers never gain from the measure. Consumers are made worse off.

Raises the price of good to the mandated price. The effect of a price floor on producers is ambiguous. This has the effect of binding that good s market. They may be worse off or no different.

Reasons for setting up price floors. Typically producers are better off. To understand how the price floors work you should have an understanding of the following. The effect of a price floor on consumers is more straightforward.

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. Price floor is enforced with an only intention of assisting producers. When government laws regulate prices instead of letting market forces determine prices it is known as price control. Supply and demand analysis.