Market Inefficiencies In 2018, U.S. Senator Kirsten Gillibrand proposed that the price floor on milk be...

Market Inefficiencies

In 2018, U.S. Senator Kirsten Gillibrand proposed that the price floor on milk be increased to $23.50 per hundredweight for milk. At the time of the proposal, dairy farmers were earning a market price of $17 per hundredweight for milk while the cost of production was $23.50. She argued the proposal was “a matter of national security and making sure our rural communities survive”.

Suppose the government sets an effective price floor for milk and that the government does not purchase any surplus milk. Draw a graph showing this situation. On your graph and verbally show/state, the competitive market price, the price floor, the quantity of milk sold with the price floor, and the quantity of milk sold with competitive market prices.

Compare the economic surplus in the market when there is a price floor and when the market operates at the competitive equilibrium. Is a price floor economically efficient? Who benefits from the price floor? Who loses?

Is the price floor for milk, “a matter of national security and making sure our rural communities survive”?

Expert Solution

( A )

( B ) As we can see in the graph above, the economic surplus is Q1Q2 due to the price floor.

At the price floor, although quantity demanded is Q1, the quantity supplied is Q2 which shows the suplus production. Now, according to the question, if the government doesn't buy surplus production, it will remain unsold or wasted.

This is why price floor is considered to be an inefficient tool to control prices in an economy. Producers or sellers benefit from higher price. The losers due to floor price are mainly the consumers who have to pay higher price than before.

( c ) It depends on the government to consider lower than market price as a matter of national security. I do not consider it as a matter of national security. However, based on laws of economics, quantity supplied is higher which has caused prices to be lower than cost price. In the long run, if there is no intervention, price would always adjust itself at sustainable equilibrium level.

Rahul Sunny answered 2 years ago

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