Question

The Agricultural Society persuades the government, in the interest of food security, to impose a price floor on local carrots in order to keep carrot farmers in the business. (a) Assess the welfare implications of this measure. (b) Assess the effectiveness of this measure in keeping farmers in carrot farming.

Answer 1

The Agricultural Society persuades the government, in the interest of food security, to impose a price floor on local carrots in order to keep carrot farmers in the business.

As we know price floor is a government imposed price control or limit on how low a price can be charged for a product, good, commodity, or service. A price floor must be higher than the equilibrium price in order to be effective. This is done by government to ensure a good price to the producer so that they can survive. It can be shown graphically as -

Initially the equilibrium was at point e, with Price = P and Quantity =Q. But government sets a minimum price for corrots at Pf, so the price cant come below it. So at this price demand<Supply and hence there is a Surplus of carrot in the market.

a) Since the price floor increases the price of the product and hence the Consumer surplus decreases as shown in the figure at the same time there is increase in producer surplus but not as much as decrease in consumer surplus. Thus there is a dead weight loss represented by the triangle. So this decreases the overall welfare of the society.

b) As far as the problem of keeping the farmers in carrot farming is concerned, this measure is quite effective in keeping them in the business because of increase in price and hence profit. But in long term this measue is not much effective because due to increase in price the demand falls and hence with lesser demand there is less probability of expansion or development of carrot market.