In economics, a price support may be either a subsidy, a production quota, or a price floor, each with the intended effect of keeping the market price of a good higher than the competitive equilibrium level.
In the case of a price control, a price support is the minimum legal price a seller may charge, typically placed above equilibrium. It is the support of certain price levels at or above market values by the government.
A price support scheme can also be an agreement set in order by the government, where the government agrees to purchase the surplus of at a minimum price. For example, if a price floor were set in place for agricultural wheat commodities, the government would be forced to purchase the resulting surplus from the wheat farmers (thereby subsidizing the farmers) and store or otherwise dispose of it.
In a hypothetical market in which supply and demand are such that the equilibrium price and quantity are $5 and 500 units, respectively, and the government then institutes an "intervention price" at $6 per unit:
The government agrees to pay $6 per unit, setting market price at $6
At that price:
consumers buy 400 units
producers supply 600 units
To maintain a price of $6 per unit, the government buys the surplus of 200 units
Consumer surplus decreases to $800
Producer surplus increases to $1800
The benefit to producers of the price support is equal to the gain in producer surplus (represented in blue).
1800 - 1250 = $550
The cost to consumers of the price support is equal to the loss in consumer surplus (represented in red).
1250 - 800 = $450
The cost to the government of the price support is equal to the cost of the surplus in the market (represented in gray).
6 * 200 = $1200
However, since the consumers ultimately pay taxes for the government to purchase the surplus, the total cost to consumers (in the short run) of the price support is the sum of the loss in consumer surplus and the cost of the government purchasing the surplus off the market.
450 + 1200 = $1650
In other words, consumers are paying $1650 in order to benefit producers $550 so price supports are considered inefficient.
The deadweight loss is the efficiency lost by implementing the price-support system. It is the change in total surplus and includes the value of the government purchase, and is equal to $1100.
price, support, this, article, does, cite, sources, please, help, improve, this, article, adding, citations, reliable, sources, unsourced, material, challenged, removed, find, sources, news, newspapers, books, scholar, jstor, december, 2009, learn, when, remov. This article does not cite any sources Please help improve this article by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Price support news newspapers books scholar JSTOR December 2009 Learn how and when to remove this message In economics a price support may be either a subsidy a production quota or a price floor each with the intended effect of keeping the market price of a good higher than the competitive equilibrium level In the case of a price control a price support is the minimum legal price a seller may charge typically placed above equilibrium It is the support of certain price levels at or above market values by the government A price support scheme can also be an agreement set in order by the government where the government agrees to purchase the surplus of at a minimum price For example if a price floor were set in place for agricultural wheat commodities the government would be forced to purchase the resulting surplus from the wheat farmers thereby subsidizing the farmers and store or otherwise dispose of it Contents 1 Short term effects 1 1 Example 2 See also 3 ReferencesShort term effects editExample edit In a hypothetical market in which supply and demand are such that the equilibrium price and quantity are 5 and 500 units respectively and the government then institutes an intervention price at 6 per unit Price 5 Quantity 500 Consumer surplus 1250 Producer surplus 1250 The government agrees to pay 6 per unit setting market price at 6 At that price consumers buy 400 units producers supply 600 units To maintain a price of 6 per unit the government buys the surplus of 200 units Consumer surplus decreases to 800 Producer surplus increases to 1800 nbsp nbsp The benefit to producers of the price support is equal to the gain in producer surplus represented in blue 1800 1250 550 The cost to consumers of the price support is equal to the loss in consumer surplus represented in red 1250 800 450 The cost to the government of the price support is equal to the cost of the surplus in the market represented in gray 6 200 1200 However since the consumers ultimately pay taxes for the government to purchase the surplus the total cost to consumers in the short run of the price support is the sum of the loss in consumer surplus and the cost of the government purchasing the surplus off the market 450 1200 1650 In other words consumers are paying 1650 in order to benefit producers 550 so price supports are considered inefficient The deadweight loss is the efficiency lost by implementing the price support system It is the change in total surplus and includes the value of the government purchase and is equal to 1100 See also editArtificial scarcity Direct and Counter Cyclical ProgramReferences edit nbsp This economics related article is a stub You can help Wikipedia by expanding it vte Retrieved from https en wikipedia org w index php title Price support amp oldid 1174063270, wikipedia, wiki, book, books, library,
