Q27 Imagine that to preserve the tra... [FREE SOLUTION]

Chapter 4: Q27 (page 105)

Imagine that to preserve the traditional way of life in small fishing villages, a government decides to impose a price floor that will guarantee all fishermen a certain price for their catch.
a. Using the demand and supply framework, predict the effects on the price, quantity demanded, and quantity supplied.
b. With the enactment of this price floor for fish, what are some of the likely unintended consequences in the market?
c. Suggest some policies other than the price floor to make it possible for small fishing villages to continue.

Short Answer

Expert verified

A) Price floor increases the price, decreases quantity demanded & increases quantity supplied. B) Price Floor leads to Excess Supply. C) Financial Assistance (Subsidy) given to producers or sellers can help small fishers.

Step by step solution

Price Floor Concept

Price floor is the minimum mandated sale price of a commodity, fixed by regulatory body to protect the interests of sellers.

It is usually set at binding level - above the equilibrium price of demand & supply intersection, for protecting sellers.

Detail Explanation

A) Market equilibrium is at E, with equilibrium price & quantity P & Q respectively. Price floor at higher P* implies that demand reduces to OQ1 & supply increases to OQ2

B) As price floor implies price higher than equilibrium, at which supply is more & demand is less - so it leads to the problem of excess supply (Q1 Q2)

Recommendation

Encouragement to small fishers can be given apart from Price Floor, by financial incentive or subsidy to buyers or sellers.

Subsidies is part of price or productive expenses sponsored by government. So, this can boost fishing sector without distorting demand & supply (as the price is same - just the burden is shared by government).