Minimum Pricsz Flashcards
What is a minimum price
A minimum price is a price floor set by the government which prices cannot fall under. This is set above the free market equilibrium price
What is the aim of a minimum price scheme
The aim of a minimum price scheme is to;
- protect producers incomes from price volatility -> farmers and primary commodity sellers
- solve market failure -> increase the costs of demerit goods such as alcohol which will discourage consumption
Draw a minimum price diagram
- extension I’m supply
- contraction in demand
- minimum price is above the equilibrium
- excess supply is shown
- deadweight welfare loss (left side)
What is an issue of a minimum price being imposed
Will lead to excess supply
How can this excess supply issue be solved
If government can afford it a guaranteed minimum price pricing scheme can be implemented
- this is when the government. Buy the excess supply at the minimum price
- the aim of the scheme is to protect the producers incomes as the excess supply is a burden to them
How does a minimum pricing scheme affect consumers
- higher prices for the consumers, which means there is a lower consumer surplus as well
- minimum pricing schemes also have more of a hit on the poor so lead to increased inequality
- consumers will also bear the burden of the gmps as they will have to fund it through increased taxes and it will lead to a decrease in government spending
How does a minimum pricing scheme increase inequality
- higher prices which has a bigger hit on the poor -> regressive
What impacts does a minimum price have on producers
- higher profits and producers surplus
- decreases uncertainty if there is gmps
- allows them to be dynamically efficient
- however these benefits are dependant on wether there is a gmps
What impact does a minimum pricing have on gievrmet
- helps improve producer welfare if reaches objectives
- however leads to a dwl
What are they gonna Do with the supply -> costly to store and a waste of resources if they throw it away
