Price support


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 (thereby subsidizing the farmers) and store or otherwise dispose of it.

Short Term Effects of Price Supports

Example

Consider a hypothetical market in which supply and demand are such that the equilibrium price and quantity are $5 and 500 units, respectively. The government then institutes a price support at $6 per unit.

The benefit to producers of the price support is equal to the gain in producer surplus (represented in blue).
*1,800 - 1,250 = $550

The cost to consumers of the price support is equal to the loss in consumer surplus (represented in red).
*1,250 - 800 = $450

The cost to the government of the price support is equal to the cost of the surplus in the market (represented in gray).
*6 * 200 = $1,200

However, since the consumers ultimately pay taxes for the government to purchase the surplus, the total cost to consumers (in the short run) of the price support is the sum of the loss in consumer surplus and the cost of the government purchasing the surplus off the market.
*450 + 1,200 = $1,650

In other words, consumers are paying $1,650 in order to benefit producers $550. For this reason, price supports are considered inefficient.


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • price support — ☆ price support n. support of certain price levels at or above market values, as by government purchase of surpluses …   English World dictionary

  • price support — price′ support n. the maintenance of the price of a commodity, product, etc., esp. by means of public subsidy or government purchase of surpluses • Etymology: 1945–50 …   From formal English to slang

  • price support — Government intervention to set an artificially high price through the use of a price floor designed to aid producers. Bloomberg Financial Dictionary * * * price support price support ➔ support2 * * * price support UK US noun [U] ► ECONOMICS,… …   Financial and business terms

  • price support — price sup.port n [U] a system in which the government keeps the price of a product at a particular level by giving the producer money or buying the product itself …   Dictionary of contemporary English

  • price support — A government policy of providing support for certain basic, usually agricultural, products to stop the price falling below an agreed level. Support prices can be administered in various ways: the government can purchase and stockpile surplus… …   Big dictionary of business and management

  • price support — Synonyms and related words: TLC, aid, alimony, allotment, allowance, annuity, assistance, autarky, bimetallism, bounty, bread, care, daily bread, depletion allowance, dole, economic self sufficiency, economic support, endowment, fair trade, fair… …   Moby Thesaurus

  • price support — the maintenance of the price of a commodity, product, etc., esp. by means of a public subsidy or government purchase of surpluses. [1945 50] * * * …   Universalium

  • price support — noun (U) a system in which the government keeps the price of a product at a fixed level by giving the producer money or buying the product itself …   Longman dictionary of contemporary English

  • price support — noun Date: 1945 artificial maintenance of prices (as of a raw material) at some predetermined level usually through government action …   New Collegiate Dictionary

  • price support — noun a government subsidy used to maintain prices at a certain level • Hypernyms: ↑subsidy …   Useful english dictionary