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Chapter 3: Q 11. (page 78)

If a price floor benefits producers, why does a price floor reduce social surplus?

Short Answer

Expert verified

Social surplus decreases because the lost consumer surplus exceeds the added producer surplus.

Step by step solution

01

Step 1. Define price floor.

When the price charged is greater than or less than the equilibrium price set by market forces of demand and supply, it is referred to as a price floor.

02

step 2. Why does a price floor reduce social surplus if a price floor benefits producers?

The net effect is negative since the losses to consumers outnumber the advantages to producers. Because the lost consumer surplus exceeds the added producer surplus, social surplus decreases.

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