Price Floor Effect On Consumer Surplus

Economics microeconomics consumer and producer surplus market interventions and international trade market interventions and deadweight loss price ceilings and price floors how does quantity demanded react to artificial constraints on price.

Price floor effect on consumer surplus. 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. Suppliers can be worse off. 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. In the price floor graph below the government establishes the price floor at price pmin which is above the market equilibrium.

Government enforce price floor to oblige consumer to pay certain minimum amount to the producers. 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. However the non binding price floor does not affect the market. Consumer surplus will only increase as long as the benefit from the lower price exceeds the costs from the resulting shortage.

Producers and consumers are not affected by a non binding price floor. Effect of price floors on producers and consumers. A price floor may lead to market failure if the market is not able to allocate scarce resources in an efficient manner. The total economic surplus equals the sum of the consumer and producer surpluses.

This mutual adjustment continues until the price reaches p where producer and consumer decisions are perfectly coordinated. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. Price floor is enforced with an only intention of assisting producers. The price continues to rise until customer demand falls to meet the level of supply or until production increases to meet the present demand.

However price floor has some adverse effects on the market. The effect of a price floor on producers is ambiguous. The opposite is true of surpluses. 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.

Effect of price floor. When there is a surplus prices drop until demand grows to meet the supply or production reduces to the level of actual demand.