Question

Suppose that the demand supply for rice is as follows (2) (30 points The equilibrium price is Ph and the equilibrium quantity is Q in free market. (1) What area can represent the consumer surplus and producer surplus? government want to control the rice price level at Po, what area can represent the consumer surplus and producer surplus in this case? (2) If (3) What kind of policies can fulfill this target? Give some specific example. What is the government's surplus in this case. Draw another graph and color this area.

Answer 1

Answer

Consumer surplus is the area below the demand curve and above the market price. Producer surplus is the area below the market price and above the supply curve. So when government controls price in the market then producer surplus and consumer surplus change.

1) at price pe , consumer surplus is A+B. And producer surplus is D.

2) at price pg, consumer surplus reduces to B, and producer surplus increases and becomes A+C+D.

3) If government sets price above the market price which is called price floor, then this policy can full fill this target.

In the foodgrains market , market price is too low that farmers incur losses. In this case government controls and increases the foodgrain price above the market price and buy the excess supply from the farmers. At higher price farmers produce more and government buy that excess foodgrains for future purpose.