Question

Suppose the government regulates the price of a good to be no lower than some minimum level. Can such a minimum price make producers as a whole worse off? Explain.

1) No. Although some producers may not be able to compete at the higher price, on net, producers as a whole will benefit from the higher minimum price.
2) Yes. If producers produce more than consumers are willing to buy, the extra cost may exceed the gain in producer surplus. The extra cost is equal to the area under the supply curve between the quantity demanded and the quantity supplied.
3) No. As long as the minimum price is above the current equilibrium price, producers as a whole will benefit from the price floor.
4) Yes. If producers produce more than consumers are willing to buy, the extra cost may exceed the gain in producer surplus. The extra cost is equal to the area under the supply curve between the market-clearing quantity and the quantity supplied.

Answer 1

Yes, a government-imposed price floor can make producers as a whole worse off if it results in a surplus that leads to unsold stock and additional costs that exceed the gains from increased producer surplus. Producers could face losses, and the economy faces deadweight loss due to reduced market transactions.

Step-by-step explanation:

When the government sets a price floor, or a legal minimum price, it is usually intended to ensure producers receive a certain minimum earnings for their product. However, such a price control can lead to unintended consequences. For instance, if the price floor is set above the market equilibrium, it may result in a surplus where the quantity supplied exceeds the quantity demanded. This excess of goods can make producers as a whole worse off for several reasons.

Firstly, the producer surplus - which is the extra benefit producers receive from selling a good at a price higher than the one they would have been willing to accept - might indeed increase initially. Yet, the surplus creates additional costs associated with unsold stock, such as storage, spoilage, or disposal costs. These costs could outweigh the gain in producer surplus. Additionally, the area under the supply curve between the quantity demanded and the quantity supplied represents a loss to producers, as resources are wasted producing goods that are not sold.

Over time, if the surplus continues, resources might be wasted as producers continue to make goods that cannot be sold at the artificially high price. Hence, while some producers may benefit from the price floor initially, on net, if the quantity produced is significantly greater than the quantity consumers are willing to buy at the price floor, producers as a whole can become worse off. The economy also faces a deadweight loss, which is a loss of total social surplus due to inefficient overproduction and reduced transactions in the market.