Suppose that the government of Saskatchewan decides to help farmers in the province during pandemic times.

Suppose that the government of Saskatchewan decides to help farmers in the province during pandemic times. Government officials designed a plan that consists of setting a minimum price for grains in local markets above the equilibrium price. We learned in Lecture 2 that a minimum price above the equilibrium price will benefit farmers (because they are now receiving a higher price). You are being asked your opinion about this policy, what could you say about the effect of the policy on total surplus (consumer and producer surpluses)? Is there any downside to this policy, who wins and who loses? Show it graphically.

Solutions

Expert Solution

If the government sets minimum price above the market price, then the farmers would be better off as they would be receiving a price higher than the market equilibrium.

This makes farmers better off. But the buyers need to pay a higher price and hence they would be worse off.

Also there would be welfare loss. This is because the whole surplus of consumer is not transferred to producers, some of it is goes as welfare loss as well, which is the deadweight loss.

So farmers gain, consumers lose and the society as a whole loses.

Rahul Sunny answered 1 year ago

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