Question

A local government just passed a price regulation, saying that a product cannot be charged less than $500 where the previous equilibrium price was $350. How would this policy affect the market outcome? Explain with the help of a graph.

Answer 1

At price floor of 500, quantity demanded is Qd and quantity supplied is Qs. This creates a surplus of Qs-Qd which leads to deadweight loss in the economy, shown as shaded triangle. This is the total surplus earlier available under free market equilibrium. Thus rather than helping producers, price floor end up hurting producers by creating Surplus.