Answer to Question #210920 in Microeconomics for Jeremy Levu

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

1.Imposing a price floor prevents a market from adjusting its equilibrium quantity and price and thus will create an inefficient outcome.

2. This can restore efficiency since the floor price stops the price from falling below a defined level. When the equilibrium price is less than the lower price limit, the supplied quantity will exceed the quantity demanded. This will result in a surplus or an excess supply. The upper and lower price limits will avoid some transactions that the buyers and sellers are willing to make and this will increase the social surplus of the economy and in turn restore efficiency.

3. The buyers lose due to the incurred expenses raised by the sellers while the government benefits as a result of the social surplus generated.