Chapter 5, Problem 4P

To determine

The accompanying table shows hypothetical demand and supply schedules for milk per year. The U.S government decides that the incomes of dairy farmers should be maintained at a level that allowa the traditional family dairy farm to survive. So it implements a price floor of $1 per pint by buying surplus milk until the market price $1 per pint.

1. Graphically show the deadweight loss from the inefficiently low quantity bought and sold due to the implementation of a price floor of $1 per pint.
2. The amount of surplus milk that will be produced as a result of the policy introduced.
3. The cost to the government of this policy.
4. The government sells the surplus milk that it is buying to the elementary schools at a price $0.60 per pint. Schools will buy any amount of milk at this low price. But parents decrease their procurement of milk by 50 million pints per year. What is the cost of the program to the government?
5. Explain the inefficiencies of the policy.

Concept Introduction:

Floor Price:

It is a government-imposed price control or limits on the minimum price that can be charged for a product. A floor price must be higher than the market price to be effective.

Deadweight Loss:

Deadweight loss is the loss of total surplus due to government intervention in the market. It is the excess burden created due to loss of benefit to the consumers, producers or the government.