A price floor (or a price support) is a government regulated price that is higher than...

A price floor (or a price support) is a government regulated price that is higher than the equilibrium price. This regulation is meant to help the supplier. Under what conditions (comment on the price elasticity of demand and supply) will this result in a net decrease of producer surplus?

Expert Solution

Elasticity of demand and supply play a major role in determining the amount of surplus earned by producer. For inelastic demand or elastic supply, the loss in producer surplus is smaller relative to the gain in producer surplus in case of a price floor. Hence there will be a net increase in producer surplus.

For inelastic supply or elastic demand, the loss in producer surplus is greater than the gain in producer surplus in case of a price floor. Hence there will be a net decrease in producer surplus.

Rahul Sunny answered 1 year ago

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