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Chapter 3: Q 11. (page 78)

If a price floor benefits producers, why does a price floor reduce social surplus?

Short Answer

Expert verified

Social surplus decreases because the lost consumer surplus exceeds the added producer surplus.

Step by step solution

01

Step 1. Define price floor.

When the price charged is greater than or less than the equilibrium price set by market forces of demand and supply, it is referred to as a price floor.

02

step 2. Why does a price floor reduce social surplus if a price floor benefits producers?

The net effect is negative since the losses to consumers outnumber the advantages to producers. Because the lost consumer surplus exceeds the added producer surplus, social surplus decreases.

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Most popular questions from this chapter

Does a price ceiling change the equilibrium price?

Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary.

a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.

b. The winter is exceptionally cold.

c. A major discovery of new oil is made off the coast of Norway.

d. The economies of some major oil-using nations, like Japan, slow down.

e. A war in the Middle East disrupts oil-pumping schedules.

f. Landlords install additional insulation in buildings.

g. The price of solar energy falls dramatically.

h. Chemical companies invent a new, popular kind of plastic made from oil

What determines the level of prices in a market?

Can you propose a policy that would induce the market to supply more rental housing units?

Let's think about the market for air travel. From August 2014 to January 2015, the price of jet fuel increased roughly 47%. Using the four-step analysis, how do you think this fuel price increase affected the equilibrium price and quantity of air travel?
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