Minimum Price (Price Floor)

Cards (12)

  • Minimum price
    A fixed price or a price floor enacted by the government usually set above the equilibrium market price
  • The government is saying the equilibrium price in the market is too low, so they want to raise it by implementing a minimum price
  • Price floor
    The lowest price that can legally exist in the market
  • Reasons for governments to use minimum prices

    • To protect producers from price volatility, especially farmers and producers of primary commodities
    • To solve market failures by raising price, discouraging consumption and production of goods/services that do harm to society
  • Impact of minimum price
    1. Price increases
    2. Demand contracts
    3. Supply expands
    4. Excess supply (surplus) created
  • Excess supply created
    Burden on producers as they have high costs but can only sell the lower quantity demanded
  • Government intervention to address excess supply

    Intervention buying - government buys up the excess supply
  • Cost of intervention buying
    Price of minimum price multiplied by the quantity of excess supply
  • With intervention buying

    Producer revenue increases as they sell the full quantity supplied at the minimum price
  • Without intervention buying

    Producer revenue only increases for the quantity demanded at the minimum price
  • Minimum price creates a deadweight welfare loss
  • Impact on stakeholders
    • Consumers - pay higher prices, consumer surplus eroded, regressive impact on low-income households
    • Producers - benefit if there is intervention buying, protected from price volatility
    • Government - concerned about cost of intervention buying, unintended consequences like black markets