Taxation and dead weight loss.
Does a binding or not binding price floor create surplus.
Example breaking down tax incidence.
When quantity supplied exceeds quantity demanded a surplus exists.
Total surplus with a binding price floor 0 2 4 6 8 10 12 14 16 18 0 2 4 6 8 10 12 14 16 18 20 p q price floor b b b b b b b a b c e d f g price floor.
In this case the price floor has a measurable impact on the market.
A price floor is an established lower boundary on the price of a commodity in the market.
When a price floor is set above the equilibrium price as in this example it is considered a binding price floor.
A binding price floor is a required price that is set above the equilibrium price.
The latter example would be a binding price floor while the former would not be binding.
Price and quantity controls.
It ensures prices stay high causing a surplus in the market.
The result is a quantity supplied in excess of the quantity demanded qd.
Note that the price floor is below the equilibrium price so that anything price above the floor is feasible.
Price ceilings and price floors.
The effect of government interventions on surplus.
Price floors set above the market price cause excess supply a price floor set above the market price causes excess supply or a surplus of the good because suppliers tempted by the higher prices increase production while buyers put off by the high prices decide to buy less.
The persistent unwanted surplus that results from a binding price floor causes inefficiencies that do not include.
This has the effect of binding that good s market.
An effective binding price floor causing a surplus supply exceeds demand.
How price controls reallocate surplus.
Qd 19 6154 1 1538p rewriting.
Because the government requires that prices not drop below this price that.
Qs 1 5714 0 7857p demand.
By contrast in the second graph the dashed green line represents a price floor set above the free market price.
The government is inflating the price of the good for which they ve set a binding price floor which will cause at least some consumers to avoid paying that price.
Types of price floors.
A inefficiently low quality b inefficient allocation of sales among sellers c wasted resources d the temptation to break the law by selling below the legal price.
Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity.
Another way to think about this is to start at a price of 100 and go down until you the price floor price or the equilibrium price.
