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.

Expert Solution

The price that government fixes above the equilibrium price is known as price flooring and the mininum support price is an example of price flooring. It is done by the government to help the farmers to get a minimum price for their products. Under price flooring, the price cannot be below the fixed minimum price, it is done by the goverment to ensure that farmers are paid a minimum amount and not too less. As there are still problems of middlemen, there are situatons that farmers get only paid even less than their cost which makes them in debt of loss. So this has been taken up by the government to ensure that farmers are paid a decent price for their products. The image is given below as the price floor is P1 which is set above the equilibrium pirce P.

Rahul Sunny answered 3 years ago

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

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