In
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
, a price support may be either a
subsidy
A subsidy, subvention or government incentive is a type of government expenditure for individuals and households, as well as businesses with the aim of stabilizing the economy. It ensures that individuals and households are viable by having acc ...
, a production quota, or a
price floor, each with the intended effect of keeping the market
price
A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...
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.
Short-term effects
Example
In a hypothetical market in which
supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris_paribus#Applications, holding all else equal, the unit price for a particular Good (economics), good ...
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 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
*
Agricultural Adjustment Act
The Agricultural Adjustment Act (AAA) was a United States federal law of the New Deal era designed to boost agricultural prices by reducing surpluses. The government bought livestock for slaughter and paid farmers Subsidy, subsidies not to plant ...
*
Artificial scarcity
*
Direct and Counter-Cyclical Program
References
Price controls
Pricing
Subsidies
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