Economics Consumer Surplus And Producer Surplus Questions
A price floor is a government-imposed minimum price that is set above the equilibrium price in a market. The impact of a price floor on consumer surplus and producer surplus depends on the specific circumstances.
In general, a price floor leads to a decrease in consumer surplus and an increase in producer surplus. This is because the price floor prevents the market price from falling to its equilibrium level, resulting in a decrease in consumer surplus.
Consumers who are willing to pay less than the price floor are unable to purchase the good or service, reducing their overall welfare. As a result, consumer surplus decreases.
On the other hand, producer surplus increases as the price floor ensures that producers receive a higher price for their goods or services. This allows producers to earn more revenue and potentially increase their profits.
However, it is important to note that the increase in producer surplus may not always offset the decrease in consumer surplus. Additionally, price floors can lead to unintended consequences such as surpluses, inefficiencies, and potential market distortions.