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