Answer to Question #212769 in Microeconomics for Christina Walu Ara

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 price floor is inefficient because the policy prevents the market from adjusting to the equilibrium price and quantity. The government restores efficiency by imposing a production quota along with the price floor as this will prevent the cost of certain goods from falling too low. The price limit raises surplus, thereby restoring efficiency. The sellers benefit if the prices are set above the equilibrium while buyers suffer from the high prices.