Answer to Question #208432 in Microeconomics for Kyle

Question

Why are price floors said to be inefficient? Can the government restore efficiency by imposing a production quota along with the price floor? Who benefits and who loses from such a program?

Answer 1

The imposition of a price ceiling or price floor will prevent the market from adjusting its equilibrium price and quantity, which will lead to inefficient results.

The government can restore efficiency since the floor price prevents the price from falling below a certain level. When the lower price limit is greater than the equilibrium price, the quantity supplied will exceed the quantity demanded, resulting in either an excess supply or a surplus. The lower price limit and the upper price limit will prevent some transactions that buyers and sellers are willing to make and cause unnecessary losses elevating the obstacles in order for quantities and prices to adjust the equilibrium levels, which will raise the social surplus of the economy hence restoring efficiency.

The one benefiting from such programs is the government based on the social surplus generated while buyers will suffer a loss based on the more incurred expenses raised by the sellers.