Price support
In economics, a price support may be either a subsidy or a price control, both with the intended effect of keeping the market price of a good higher than the competitive equilibrium level.
In the case of a price control, a price support is the minimum legal price a seller may charge, typically placed above equilibrium. It is the support of certain price levels at or above market values by the government.
A price support scheme can also be an agreement set in order by the government, where the government agrees to purchase the surplus of at a minimum price. For example, if a price floor were set in place for agricultural wheat commodities, the government would be forced to purchase the resulting surplus from the wheat farmers and store or otherwise dispose of it.
Short-term effects
Example
In a hypothetical market in which supply and demand are such that the equilibrium price and quantity are $5 and 500 units, respectively, and the government then institutes a price floor at $6 per unit:
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- 1800 - 1250 = $550
- 1250 - 800 = $450
- 6 * 200 = $1200
- 450 + 1200 = $1650
The deadweight loss is the efficiency lost by implementing the price-support system. It is the change in Total Surplus and includes the value of the government purchase, and is equal to $1100.