2017 Isb Market Efficiency Price Ceiling Price Floor

                                        Price Floor

       Price                                                                              CSComp = A + B + C[pic 1]

                                                                      PSComp = E + F[pic 2]

                                                                      SWComp = A + B + C + E + F

                        A[pic 3]

                                                                            If only QF produced

        PF                                                                               CSF = A and PSF = B + E[pic 4]

                     B                                D                            SWF = A + B + E so DWL = C + F[pic 5][pic 6]

                                                    C

           PC                                        F                G           What if Q produced and gov’t buys  [pic 7][pic 8]

                      E                                              Q – QF at price PF         

                                                                     CSF = A

                                                                     PSF = TR – VC =

                                                                         B+C+D+E+F+G+H+I+J

• (G+H+I+J)

                        H                    I            J                               Gov’t Subsidy =

                                                                                         C+D+F+G+I+J)[pic 9]

                                              QF               QC            Q                             Quantity

SWF = CSF + PSF – Gov’t Subsidy = A + B + E – G – I - J

SWC – SWF = A + B + C + E + F – (A + B + E – G – I – J) = C + F + G + I + J So it’s greater than the deadweight loss when only QF is produced.

How about you pay farmers their cost of growing Q – QF units of crops, i.e., I + J + G, to NOT grow Q – QF units of crops. Then CSF = A, PSF = B  + E + G + I + J, Gov’t Subsidy = G + I + J so SWF = A + B + E + G + I + J – G –I –J = A + B + E.

Then SWComp – SWF = A + B + C + E + F – (A + B + E) = C + F (same as the deadweight loss if only QF produced. So this is a cheaper way to solve the farmer’s income problem (but the farmer’s don’t get as much as they would if they produced Q and sold Q – QF to the government. But we didn’t want them to produce QF in the first place. So this gets them to produce the QF the market demands when the price is PF and there’s no excess supply and the farmers get extra income, and the social welfare loss is just C + F.

Courtesy of Jaydeep. How about you pay farmers the producer surplus they would have earned if they grew Q – QF units of crops, i.e., C + D + F, to NOT grow Q – QF units of crops. Then

CSF = A, PSF = B + E + C + D + F, Gov’t Subsidy = C + D + F so SWF = A + B + E + C + D + F – C – D - F = A + B + E.

Then SWComp – SWF = A + B + C + E + F – (A + B + E) = C + F (same as the deadweight loss if only QF produced). Since C + D + F < I + J + G this is a cheaper solution from the government’s perspective (but the farmer’s get even less than above). But we didn’t want them to produce QF in the first place. So this gets them to produce the QF the market demands when the price is PF and there’s no excess supply and the farmers do get extra income for doing nothing more than producing QF. and the social welfare loss is just C + F.