Minimum price Flashcards
What is minimum price?
The government can set a minimum price to prevent the market price from falling below a certain level
What is guaranteed minimum price?
The government will buy up excess supply to guaranteed the minimum price eg: some agricultural minimum prices
What is the legal minimum price?
The government sets the minimum by law meaning there is a ban on sales below the price set and the government does not buy up any surplus eg: minimum price of alcohol
What is the rationale for minimum prices?
To support the incomes and jobs of producers and encourage investment and innovation
To discourage consumption of goods that are bad for social welfare, have negative externalities or where consumers may lack all information
To prevent consumers abusing any monopsony power they have at expense of suppliers
What are the consequences of minimum price?
The minimum price causes a surplus of the good
There is a disequilibrium at the minimum price
The price cannot fall to remove the excess supply - has lost its signalling and incentivising functions
For a legal minimum, firms cannot sell more than QD so they will reduce their supply
For a guaranteed minimum the government will buy up the surplus at the minimum price
There is potential for government failure
What are examples for minimum price?
Minimum price for alcohol
National minimum wage
Minimum care worker price
Agricultural support where price is guaranteed to firms
Guaranteed prices for renewable energy suppliers
What are problems with minimum prices?
Excess supply needs addressing
For legal minimum price - suppliers cannot sell any excess so they will cut supply, output and jobs
For guaranteed minimum price - intervening to buy up the surplus can be expensive (opportunity cost), surplus will need storing, selling on, destroying etc.
There may be better alternative policies the government could use if it believes the market price is too low eg: indirect taxes, provision of information,regulation etc.
