4.1.8.9 Government Intervention: Min. Prices

price floors/minimum prices

a gov. policy that sets a legal price floor, meaning the price of a good.service cannot fall below a certain level

support producers by ensuring they receive a fair income even with very low market prices

Why are min. prices used?

surplus, Qs>Qd

if min price set above market price:

buy it or find other ways to manage it

What may the government do when there is excess supply(surplus)?

higher prices

How do min. prices hurt consumers?

protects producers’ incomes, encourages production stability, promotes rural development

advantages of minimum prices

ensures producers receive a fair income even when market prices drop

how do min. prices protect producers’ incomes?

farmers in agricultural industry where prices fluctuate due to weather and global market conditions

Min prices are particularly helpful for who?

guarantees min. income=>producers less likely to leave market during low price periods=>ensures stable supply for goods like food

How does min. prices encourage production stability?

min price=>helps protect small farmers and rural economies=>prevents economic decline in agricultural regions that rely heavily on farming

How do min. prices promote rural development?

Common Agricultural Policy [CAP]

set min. prices for crops like wheat and milk to ensure farmers received stable incomes and could continue producing

excess supply[surplus], higher prices for consumers, inefficient resource allocation

disadvantages of min. prices

min. price set above market price=>producers supply more than consumers demand=>surplus(Qd>Qs)

how do min. price create surpluses?

expensive to buy and store

Why is excess supply[surplus] a problem for governments?

min. price=>increases price=>less affordable=>hurts low income households

how do min. prices cause higher prices for consumers?

overproduction by producers=>supported by min. price=>diverts resources from more efficient uses

How can min. prices cause inefficient resource allocation?

EU had to store or dispose of “butter mountains” and “milk lakes” due to overproduction caused by min. price

What is an example of Common Agricultural Policy[CAP] causing inefficient allocaiton of resources

PED, gov. intervention, regressive impact on consumers

What does min prices depend on(AO4)?

inelastic - minimal impact, elastic - significant impact on demand

How does min. prices depend on PED?

depends on gov.’s ability to manage surplus

How does min. prices depend on gov. intervention?

depends on how much consumers are willing and able to pay the higher prices, depends on whether gov. is able to cover negative effects

How does min. prices depend on regressive impact on consumers?