Effect Of Price Floor On Consumer Surplus

Consumer surplus will only increase as long as the benefit from the lower price exceeds the costs from the resulting shortage.

Effect of price floor on consumer surplus.

When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. When government laws regulate prices instead of letting market forces determine prices it is known as price control. Raises the price of good to the mandated price. 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. Creates a dead weight loss. Price floors prevent a price from falling below a certain level. If the price floor was set above the equilibrium.

Consumers never gain from the measure. 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. Reasons for setting up price floors. Consumers are made worse off.

However price floor has some adverse effects on the market. The result is a surplus of the good due to unsold goods. 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. They may be worse off or no different.

The total economic surplus equals the sum of the consumer and producer surpluses. Producers may be better off no different or worse off as a result of the measure. This has the effect of binding that good s market. Typically producers are better off.

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. If price floor is less than market equilibrium price then it has no impact on the economy. Reduces the quantity produced and consumed.

But if price floor is set above market equilibrium price immediate supply surplus can be observed. The effect of a price floor on producers is ambiguous. Effects of price floors. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price.