Question

The government making purchases to ensure a price floor of $15. Assume the government can sell the product for $10 on the world market.An output subsidy (or deficiency payment) of $3.00. Which of these two policies (deficiency payment or price floor) would be preferred by producers? Which program would be preferred by the average individual in society who is both a consumer and a taxpayer?

Answer 1

Answer : Producers will prefer the price floor policy. Because at price floor policy the producers get more profit than the without price floor policy situation.

"The average individual who is a consumer and taxpayer" will prefer deficiency payment policy. Because of deficiency payment producers produce more which increase the market supply. As a result, the market price level fall. Due to falling price the average individual "who is a consumer and taxpayer" get more consumer surplus as a consumer and pays less tax or zero tax based on tax rate level on products than the price floor situation.