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

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

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Answer #1
  • Price floor is a limit set by the government in which the price of good must always exceed the equilibrium price.
  • Due to the higher prices, producer's benefit when the price floor is set by the government and the customers incur losses due to higher prices.
  • Losses to customers exceeds the benefits to producer's and the net effect become negative.
  • Since customers are unwilling to buy greater quantities at higher price's and because the lost customer surplus exceeds the earned producer surplus.
  • This will cause the social surplus to fall.
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