Question

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

a) It reduces consumer demand
b) It encourages overproduction
c) It creates a surplus of goods
d) It increases deadweight loss

Answer 1

A price floor causes overproduction and a surplus of goods, leading to an inefficient outcome and an increase in deadweight loss, thereby reducing social surplus.

Step-by-step explanation:

If a price floor benefits producers by ensuring they receive a certain price for their goods, you might wonder why it would reduce social surplus. A price floor can lead to reduced social surplus because it encourages overproduction, creates a surplus of goods, and increases deadweight loss. These outcomes are inefficient because the price floor prevents the market from reaching its equilibrium where the quantity supplied equals the quantity demanded. As a result, not all mutually beneficial transactions take place. To be more specific, some of the consumer surplus is transferred to producers, but overall, there is a net loss in economic welfare or total surplus, which comprises of both consumer and producer surplus.