3.3.2 Minimum Price

Question 1

What is a price floor

Answer 1

A legally set minimum price

Question 2

Reasons for minimum price

Answer 2

1. Provide income support for farmers
2. To protect low skilled, low wage workers by offering them a wage (minimum wage)

Question 3

Consequences of agricultural price floors

Answer 3

1. Surpluses
2. Firm inefficiency
3. Decrease in social welfare (refer graph)
   - social surplus decreases

Question 4

Consequences of price floors to various stakeholders

Answer 4

1. Government
   - increase government expenditure for buying the surplus
   - additional cost of storing the surplus or subsidising exports
2. Stakeholders in other country
   - Surpluses exported will increase supply to world market, lower prices in world market