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What is a minimum price or price floor?
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A minimum price or price floor is a fixed price set by the government, usually above the equilibrium market price, to prevent prices from falling below a certain level.
What is the role of government intervention in managing surplus caused by minimum prices?
The government may engage in intervention buying, purchasing the surplus to maintain the minimum price, with the cost determined by the area representing excess supply in the market diagram.
Discuss the potential long-term burden on consumers from minimum price interventions.
Over time, the tax burden to fund government intervention purchases, which maintain minimum prices, can fall disproportionately on consumers, especially affecting lower-income households.
What is deadweight loss in the context of minimum prices?
Deadweight loss refers to the reduction in total welfare and market efficiency caused by a decrease in overall market quantity due to the imposition of a minimum price.
How does intervention buying influence producer revenue when minimum prices are implemented?
With intervention buying, producer revenue equals the minimum price multiplied by the quantity supplied (P min × QS); without it, revenue equals the minimum price times the quantity demanded (P min × QD).
How do minimum prices protect producers?
Minimum prices shield producers, especially in agriculture, from price volatility by guaranteeing a minimum income, thus protecting them from significant revenue fluctuations.
What range of impacts do minimum prices have on producers without intervention buying?
Without intervention buying, the impact on producers is uncertain as they may face unsold surplus and decreased revenue, depending on how much quantity is supplied versus demanded.
What are the potential benefits to producers if a government intervenes with buying surplus?
Producers benefit as intervention buying ensures increased revenue and surplus, as the government purchases excess supply, thus stabilizing their income.
Explain how minimum prices can lead to market failure mitigation.
Minimum prices can help mitigate market failures by raising the prices of harmful goods, thus reducing their consumption and production, as in the case with alcohol.
What are some of the potential negative effects on governments when imposing minimum prices?
Governments face challenges like negative consumer impacts, regressive effects, managing surplus, and the risk of black markets, as well as international complications if surplus is dumped.
In what ways can minimum prices fulfill their noble intentions despite causing market distortions?
Minimum prices can stabilize producer income, protect vital industries, and control the consumption of harmful products, even though they can lead to inefficiencies and surpluses in the market.
How do consumers typically react to higher prices due to minimum prices?
Consumers experience a negative impact as higher prices reduce their surplus and affordability, with regressive effects that disproportionately affect low-income households.
What is the impact of a minimum price on market supply and demand?
A minimum price set above equilibrium causes a price increase, demand contraction, supply expansion, and results in excess supply or surplus as supply exceeds demand.
Why might minimum prices lead to the creation of a black market?
Minimum prices might lead to black markets as consumers seek cheaper options elsewhere due to increased prices and decreased availability in the regular market.
Describe two specific ways minimum prices can affect international relations.
Minimum prices can affect international relations by creating trade tensions if surplus products are dumped globally, and they may lead to disputes with trade partners over fair competition and market access.
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