Price Floor Consumer Surplus

The total economic surplus equals the sum of the consumer and producer surpluses.

Price floor consumer surplus. Consumers are clearly made worse off by price floors. Price floors prevent a price from falling below a certain level. Suppliers can be worse off.

Calculate consumer surplus figure 2. Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. They are forced to pay higher prices and consume smaller quantities than they would with free market.

So government has to intervene and buy the surplus inventories. Price helps define consumer surplus but overall surplus is maximized when the price is pareto optimal or at equilibrium. When government laws regulate prices instead of letting market forces determine prices it is known as price control.

When price floor is continued for a long time supply surplus is generated in a huge amount. But since it is illegal to do so producers cannot do anything. The result is that the quantity supplied qs far exceeds the quantity demanded qd which leads to a surplus of the product in the market.

In case of producer surplus producers would have reduced the price to increase consumers demands and clear off the stock. But the price floor p f blocks that communication between suppliers and consumers preventing them from responding to the surplus in a mutually appropriate way.