Final answer:
A binding price floor can increase or decrease producer surplus because while producers may receive a higher price for each unit sold, the overall quantity sold can decrease, leading to potential losses for some producers.
Step-by-step explanation:
When a binding price floor exists, contrary to the student's initial statement, producer surplus does not always decrease, but could actually increase or decrease depending on various market factors. A price floor, which is a legal minimum price set above the equilibrium price, can lead to a surplus of the product because the quantity supplied by producers at this higher price exceeds the quantity demanded by consumers.
While it is true that a price floor can reduce the quantity of transactions due to the excess of supply, it can also lead to producers receiving a higher price for the goods they do sell, which can increase their producer surplus. However, since fewer goods are sold overall, there could be cases where producers who cannot sell their products lose out despite the higher price.