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Why the introduction of a minimum price below the equilibrium price reduces social welfare?
Wiki User
∙ 10y ago
If the prices are set below the level of equilibrium, the quantity supplied will be less than the quantity demanded. Introduction of minimum prices will lead to hoarding of goods, thus social welfare falls.
Wiki User
∙ 10y ago
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What happens when you Impose a price ceiling below the equilibrium price will lead to higher consumer surplus and an increase in social welfare?
If you impose this low price ceiling, manufacturers will make less and be forced to lay off workers causing higher unemployment. Therefore, social welfare would decreaase, not increase.
Why do government sometimes set prices?
In some cases the price for an object as achieved by supply and demand does not cover the average cost of an item. If this is the case, there is an incentive not to produce to save money. Therefore, the government will enact a price floor so that the industry will find it profitable to produce and thus do so.
How do you determine optimum production?
Three important cases: Total productive surplus is maximised at consumer equilibrium. Total profit is maximised when marginal cost = marginal benefit. Social welfare is maximised where marginal social cost = marginal social benefit.
What is an economic floor?
Price FloorsA price floor is the lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage--the minimum price that can be payed for labor. Price floors are also used often in agriculture to try to protect farmers. For a price floor to be effective, it must be set above the equilibrium price. If it's not above equilibrium, then the market won't sell below equilibrium and the price floor will be irrelevant.Drawing a price floor is simple. Simply draw a straight, horizontal line at the price floor level. This graph shows a price floor at $3.00. You'll notice that the price floor is above the equilibrium price, which is $2.00 in this example.A few crazy things start to happen when a price floor is set. First of all, the price floor has raised the price above what it was at equilibrium, so the demanders (consumers) aren't willing to buy as much quantity. The demanders will purchase the quantity where the quantity demanded is equal to the price floor, or where the demand curve intersects the price floor line. On the other hand, since the price is higher than what it would be at equilibrium, the suppliers (producers) are willing to supply more than the equilibrium quantity. They will supply where their marginal cost is equal to the price floor, or where the supply curve intersects the price floor line.As you might have guessed, this creates a problem. There is less quantity demanded (consumed) than quantity supplied (produced). This is called a surplus. If the surplus is allowed to be in the market then the price would actually drop below the equilibrium. In order to prevent this the government must step in. The government has a few options:1. They can buy up all the surplus. For a while the US government bought grain surpluses in the US and then gave all the grain to Africa. This might have been nice for African consumers, but it destroyed African farmers.2. They can strictly enforce the price floor and let the surplus go to waste. This means that the suppliers that are able to sell their goods are better off while those who can't sell theirs (because of lack of demand) will be worse off. Minimum wage laws, for example, mean that some workers who are willing to work at a lower wage don't get to work at all. Such workers make up a portion of the unemployed (this is called "structural unemployment").3. The government can control how much is produced. To prevent too many suppliers from producing, the government can give out production rights or pay people not to produce. Giving out production rights will lead to lobbying for the lucrative rights or even bribery. If the government pays people not to produce, then suddenly more producers will show up and ask to be payed.4. They can also subsidize consumption. To get demanders to purchase more of the surplus, the government can pay part of the costs. This would obviously get expensive really fast.Although some of those ideas may sound stupid, the US government has done them. In the end, a price floor hurts society more than it helps. It may help farmers or the few workers that get to work for minimum wage, but it only helps those people by hurting everyone else. Price floors cause a deadweight welfare loss.A deadweight welfare loss occurs whenever there is a difference between the price the marginal demander is willing to pay and the equilibrium price. The deadweight welfare loss is the loss of consumer and producer surplus. In other words, any time a regulation is put into place that moves the market away from equilibrium, beneficial transactions that would have occured can no longer take place. In the case of a price floor, the deadweight welfare loss is shown by a triangle on the left side of the equilibrium point, like in the graph. The area of the triangle is the amount of money that society loses.
Welfare economics-meaning-scope and importance?
Welfare economicsis a branch of economics that uses microeconomic techniques to evaluate well-being from allocation of productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium. It analyzes social welfare, however measured, in terms of economic activities of the individuals that compose the theoretical society considered. Accordingly, individuals, with associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units.Welfare economics typically takes individual preferences as given and stipulates a welfare improvement in Pareto efficiency terms from social state Ato social state Bif at least one person prefers Band no one else opposes it. There is no requirement of a unique quantitative measure of the welfare improvement implied by this. Another aspect of welfare treats income/goods distribution, including equality, as a further dimension of welfare.Social welfarerefers to the overall welfare of society. With sufficiently strong assumptions, it can be specified as the summation of the welfare of all the individuals in the society. Welfare may be measured either cardinally in terms of "utils" or dollars, or measured ordinally in terms of Pareto efficiency. The cardinal method in "utils" is seldom used in pure theory today because of aggregation problems that make the meaning of the method doubtful, except on widely challenged underlying assumptions. In applied welfare economics, such as in cost-benefit analysis, money-value estimates are often used, particularly where income-distribution effects are factored into the analysis or seem unlikely to undercut the analysisFrom wikipediaNdugga Michael
Can you have a checking account if you are on welfare?
Yes, but be aware there may be a minimum deposit.
Should welfare funds be limited?
Welfare money should be replaced with welfare coupons for necessities. If a person is too lazy to get a job death is still not an appropriate punishment for lazyness so they should still get welfare, but they should get the bare minimum. That will motivate the vast majority of people, since most people aren't happy with the bare minimum.
What does the welfare state provide in the UK?
The illusion of a minimum standard of living for all. There are still people who have to rely on charities and food banks.
What has the author Thomas E MaCurdy written?
Thomas E. MaCurdy has written: 'Who will be affected by welfare reform in California?' -- subject(s): Aid to families with dependent children programs, Public welfare, Statistics, United States, Welfare recipients 'Who benefits and who pays for minimum wage increases in California?' -- subject(s): Labor costs, Minimum wage
What is the minimum donation you can contribute as a permanent donor to edhi Welfare Foundation to serve the ailing humanity?
10
Is welfare reform good or bad?
GOOD, in think wlefare reform is good until the person's need. because the main source of welfare reform is for the needy.it inculdes 3 elements. 1) It reduces welfare spending. 2) It increases state and local power to oversee wlefare rules. 3) It adds new restrictions to the welfare eligibility.
What has the author Mary Wirtz Macht written?
Mary Wirtz Macht has written: 'Introduction to social work and social welfare' -- subject(s): Social service
What has the author John B Himelrick written?
John B. Himelrick has written: 'An introduction to state capacity building' -- subject(s): Child welfare, Children
What happens when you Impose a price ceiling below the equilibrium price will lead to higher consumer surplus and an increase in social welfare?
If you impose this low price ceiling, manufacturers will make less and be forced to lay off workers causing higher unemployment. Therefore, social welfare would decreaase, not increase.
What is the introduction to the preamble to the constitution?
There is not an introduction to the Preamble. The Preamble is the introduction to the Constitution. It states, "We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish the constitution for the United States of America."
What has the author David Tiplady written?
David Tiplady has written: 'Housing welfare law' -- subject(s): Housing, Landlord and tenant, Law and legislation 'Introduction to the Law of International Trade'
What has the author Neil Gilbert written?
Neil Gilbert has written: 'Capitalism and the Welfare State' -- subject(s): Social policy, Welfare state, Economic conditions, Social service, Capitalism 'Welfare justice' -- subject(s): Welfare state, Social policy, Public welfare administration 'An introduction to social work practice' -- subject(s): Social service 'Child protection systems' -- subject(s): Child welfare, Child abuse 'Gender and Social Security Reform' 'Combatting Child Abuse' 'Biometrical interpretation' -- subject(s): Biometry 'Handbook of the social services' -- subject(s): Service social, Social service 'The enabling state' -- subject(s): Welfare state, Human services, Public welfare
