Typically producers are better off.
Effect of price floor on consumer surplus.
Reasons for setting up price floors.
The effect of a price floor on producers is ambiguous.
Reduces the quantity produced and consumed.
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.
Supply and demand analysis.
Effects of price floors.
However price floor has some adverse effects on the market.
But if price floor is set above market equilibrium price immediate supply surplus can be observed.
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.
The total economic surplus equals the sum of the consumer and producer surpluses.
Consumer and producer surplus.
This has the effect of binding that good s market.
If price floor is less than market equilibrium price then it has no impact on the economy.
Consumer surplus will only increase as long as the benefit from the lower price exceeds the costs from the resulting shortage.
Producers may be better off no different or worse off as a result of the measure.
Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price.
When government laws regulate prices instead of letting market forces determine prices it is known as price control.
When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.
Creates a dead weight loss.
The effect of a price floor on consumers is more straightforward.
To understand how the price floors work you should have an understanding of the following.
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.
Price floor is enforced with an only intention of assisting producers.
Raises the price of good to the mandated price.
Consumers are made worse off.
If the price floor was set above the equilibrium.
Consumers never gain from the measure.
They may be worse off or no different.
