Demonstrate Graphically and Explain Verbally How a Price Floor May

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The Answer is The key to the story is that a price floor will create a dead weight loss just as a tax does. Furthermore, the price floor involves a transfer of consumer surplus to producer surplus that is essentially a tax on consumers and a subsidy for producers. All of this is illustrated in the diagram below:

The key to the story is that a price floor will create a dead weight loss just as a tax does. Furthermore, the price floor involves a transfer of consumer surplus to producer surplus that is essentially a tax on consumers and a subsidy for producers. All of this is illustrated in the diagram below: The market outcome is P<sub>0</sub> and Q<sub>0</sub> with consumer surplus of A + B + C and producer surplus of D + E + F. When a price floor of PF is imposed the new quantity exchanged is Q<sub>1</sub> (< Q<sub>0</sub>). This results in a consumer surplus of A; a producer surplus of B + D + F; and a dead weight loss of C + E. Area B is a transfer of consumer to producer surplus that is effectively a tax on consumers and a subsidy to producers.

The market outcome is P₀ and Q₀ with consumer surplus of A + B + C and producer surplus of D + E + F. When a price floor of PF is imposed the new quantity exchanged is Q₁ (< Q₀). This results in a consumer surplus of A; a producer surplus of B + D + F; and a dead weight loss of C + E. Area B is a transfer of consumer to producer surplus that is effectively a tax on consumers and a subsidy to producers.

Demonstrate Graphically and Explain Verbally How a Price Floor May

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Demonstrate Graphically and Explain Verbally How a Price Floor May

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