Question

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

Short answer

The social surplus in the society decreases when a government sets the price floor above the market equilibrium price level.

Step-by-step solution

Defination

Price Ceiling: It is a practice adopted by the government in which it sets the maximum price of a commodity in the market and no seller can sell the product more than the maximum price set by the government.

Price Floor: It is a price policy in which the government sets the minimum price level below which no buyer can purchase and no seller is allowed to sell the product in the market.

Explanation

The social surplus in the society decreases when a government sets the price floor above the market equilibrium price level.

If the government sets the minimum price (P) which is more than equilibrium price level, then it will benefit the producers as they would get more than the market clearing price level. Therefore, the producer surplus rises and consumer surplus falls. Also, if the price floor or minimum price level is set above the equilibrium price level then there will be more of supply and less of demand and price cannot go below the minimum price level set by the government. So, market would not achieve equilibrium position. As a result, there will always be a dead weight loss represented by the triangle ABE in the following diagram, which reduces the social surplus in the society.