economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

, a price support may be either a subsidy, a production quota, or a price control, each with the intended effect of keeping the market

price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...

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 (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 In economics, deadweight loss is the difference in production and consumption of any given product or service including government tax. The presence of deadweight loss is most commonly identified when the quantity produced ''relative'' to the amoun ...

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.

References

Price controls Pricing Subsidies {{Econ-stub

Short-term effects

Example

See also

References