5.c The Effects of Price Floors.doc

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1、5.cTheEffectsofPriceFloorsApricefloorisabasepriceatwhichanitemcanbesold.Ifapricefloorisimposedbelowthenaturalequilibriumprice,itisnotbinding.Apricefloorthatisnotbindinghasnoaffectonthecurrentpriceofagood.Ontheotherhand,ifthepricefloorissetabovetheequilibriumprice,iti

2、ssaidtobebinding,resultinginasurplus.Figure5.c.1demonstratesthiswithcandybars.Figure5.c.1Withoutfreetradeinterference,thenaturalmarketpriceforacandybaris$1.00.Whenthegovernmentimposesapricefloorof$1.50,thequantitysupplied(17)exceedsthequantitydemanded(5)by12units,res

3、ultinginasurplusofcandybars.5.cExample:MinimumWageAnotherversionofthepricefloorthatthegovernmentimposesisknownasminimumwage.Thisistheleastpossiblesalaryanemployeemayreceive.Theminimumwagelawonlyaffectsunskilledandnewworkers(mostlyteenagers)andtheemployers.SeeFigure5.

4、c.2.Figure5.c.2Thenaturalmarketpriceforlaboris$5.Aminimumwageof$7decreasestheemployer’ssurplus(CS-consumersurplus)bytheareasBandC.Meanwhileitincreasestheemployees’surplus(PS-producersurplus)bytheareaBanddecreasesitbytheareaE.Sincethelabordemandeddecreasedfrom100to70,

5、30peoplelosttheirjobs.Thereisalsoasurplus(unemployment)of50becausethelaborsuppliedexceedsthelabordemanded.Figure5.c.3illustratesatableontheeffectsofminimumwage.Figure5.c.3ThistableclearlydefinestheshadedregionsofthegraphinFigure5.c.2.Thedeadweightloss(DWL)isthenetlos

6、stosocietybecauseoftheminimumwage.Inotherwords,thegovernmentimposedminimumwagemadeourcountrypoorer-anunintendedconsequence.5.cExample:FarmPriceSupportsIntheUnitedStates,thegovernmentsetsapricefloorformilk,whichcausesasurplus.Thegovernmentthenbuysthesurplusandstoresit

7、.It’sasiftheyboughtitandthenthrewitaway.RefertoFigure5.c.4.Figure5.c.4Afterthegovernmentimposesa$3.75priceceilingonmilk,thereisa10-unitsurplus.Thegovernmentbuysthesurplusandstoresit.ThegovernmentsuffersalossequivalenttotheareaBCJE.RefertoFigure5.c.5.Figure5.c.5Thisis

8、atabledefiningconsumersurplus(CS)andproducersurplus(PS).ConsumersurplusdecreasesbytheareaHBIGwhileproducersurplusincreasesbythearea