Answer to Question #121856 in Microeconomics for talhashakeel shakeel

Question

A news piece regarding Sugar inquiry commission report is available at the following link.
https://dunyanews.tv/en/Pakistan/546488-Govt-makes-Sugar-inquiry-commission-report-public
Read the report carefully. With the help of graph, analyze the possible consequences of setting price floor of sugarcane below equilibrium price. Compare your conclusions with the ones, stated in this report.

Answer 1

The price floor prevents a price from falling below a certain level. Price floors are usually set by the government to prevent prices from falling too low. Price floor are used in agriculture sector to protect farmers and they are also used to minimum wage that can be payed for labor.

Conclusion

If the price floor is not set above the equilibrium, it’s Irrelevant. This is because the market bears a higher market price for products. 

From the report,the market is not controlled by demand and supply forces,there is interference from other parties with intentions to control the industry for their own benefit, And as such it is difficult to determine equilibrium price and set price floors that will benefit the sugarcane farmer.

The support price in this case set by the government with the intention of helping the farmers should work well, if there are no cartels in the industry and there is flow of demand and supply push.However determining sufficiency of price support remains a challenge due to cartels/brokers interference which may render price flows to beset below equilibrium leading to NO effect.