In
economics, a price support may be either a
subsidy, a production quota, or a
price control
Price controls are restrictions set in place and enforced by governments, on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of good ...
, 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 level
The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set. ...
s 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
A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product, good, commodity, or service. A price floor must be higher than the equilibrium price in order to be effective. The equilibrium p ...
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.
Short-term effects
Example
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 a price floor at $6 per unit:
The benefit to producers of the price support is equal to the gain in
producer surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities:
* Consumer surplus, or consumers' surplus, is the monetary gain ...
(represented in blue).
*1800 - 1250 = $550
The cost to consumers of the price support is equal to the loss in
consumer surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities:
* Consumer surplus, or consumers' surplus, is the monetary gain ...
(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
*
Direct and Counter-Cyclical Program
The Direct and Counter-cyclical Payment Program (DCP) of the USDA provides payments to eligible producers on farms enrolled for the 2002 through 2007 crop years. There are two types of DCP payments – direct payments and counter-cyclical payments. ...
References
Price controls
Pricing
Subsidies
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