minimum prices

What is a minimum price

A minimum price is a price set by government,

below which the price is not allowed to fall

◻ To be effective the minimum price needs to be set

above the free market equilibrium price

What is the purpose of a minimum price

Generally used to raise the price of a good that

creates a negative externality

- The increase in price should push it nearer to

reflecting the social costs – i.e. the total costs to

society

What are examples of minimum prices

Market for alcohol- in Scotland 50p per unit minimum price, yet rejected by parliament on England and wales

Effect of minim price on diagram

It creates a surplus as there is excess supply rather than demand

Impact on consumer surplus

Consumer surplus decreases as the price rises

- This makes the gap between the market price and

the price consumers are willing to pay larger

Impact of producer surplus

Producer surplus increases as the price rises

- This makes the gap between the market price and

the price producers are willing to sell for larger