Answer to Question #213972 in Microeconomics for Gloria

Question

1. 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? ( Max.500 words)

Answer 1

The most effective quantity of production for society is the equilibrium quantity. When a price floor is imposed on a market, it prevents it from adjusting to its equilibrium price, resulting in an inefficient conclusion hence the price floors are said to be inefficient.

Because the floor price prohibits prices from dropping below a particular level, the government may restore efficiency. When the lower price limit is higher than the equilibrium price, the quantity provided exceeds the amount sought, resulting in a surplus or excess supplies. The minimum and maximum price limits will prevent certain transactions that buyers and sellers are eager to conduct, resulting in needless losses, raising the barriers in order for prices and production to adjust to equilibrium levels, raising the economy's social surplus and so recovering efficiency.

The government benefits from such initiatives because of the social surplus produced, but purchasers lose money because of the increased expenditures spent by the sellers.