Economics Consumer Surplus And Producer Surplus Questions Medium
A price floor is a government-imposed minimum price that is set above the equilibrium price in a market. When a price floor is implemented, it has a direct impact on consumer surplus.
The impact of a price floor on consumer surplus depends on the specific market conditions and the extent to which the price floor is set above the equilibrium price. In general, however, a price floor tends to reduce consumer surplus.
When a price floor is set above the equilibrium price, it creates a situation where the quantity supplied exceeds the quantity demanded. This leads to a surplus of goods in the market, as producers are willing to supply more at the higher price, but consumers are not willing to purchase as much at that price.
As a result, some consumers who were willing to purchase the good at the equilibrium price are now priced out of the market due to the higher price floor. This reduces the overall quantity of goods consumed and decreases consumer surplus.
Additionally, the price floor may also lead to a decrease in the quality of goods available in the market. Producers may cut costs or reduce the quality of their products to maintain profitability at the higher price floor. This further reduces consumer surplus as consumers are not able to enjoy the same level of satisfaction from the goods they purchase.
In summary, a price floor generally reduces consumer surplus by reducing the quantity of goods consumed and potentially decreasing the quality of goods available in the market.