Chapter - 2.10.3
Pages Covered - 74-76
Minimum Price
A minimum price is set by the government above the existing free market equilibrium price & sellers cannot legally sell the good/service at a lower price
Governments will often use minimum prices in order to help producers or to decrease consumption of a demerit good e.g. alcohol
Diagram Analysis
The initial market equilibrium is at PeQe
A minimum price is imposed at Pmin
The higher price increases the incentive to supply & there is an extension in QS from Qe → Qs
The higher price decreases the incentive to consume & there is a contraction in QD from Qe → Qd
This creates a condition of excess supply QdQs
Advantages Of Minimum Price
In agricultural markets, producers benefit as they receive a higher price (Governments will often purchase the excess supply & store it or export it)
When used in demerit markets, output falls (Governments will not purchase the excess supply of a demerit good)
Producers usually lower their output in the market to match the QD at the minimum price & this helps to reduce the external costs
Disadvantages Of Minimum Price
It costs the government to purchase the excess supply & an opportunity cost is involved
Farmers may become over-dependent on the Government's help
Producers lower output which may result in an increase in unemployment in the industry