IB Price Floors Commentary Essay
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Price floors are instruments that are used by the government to raise the minimum price at which the goods can be sold at, hence increasing the quality of life of the people that are producing the good.
Rice from Thailand was being sold at 13,00 thousand baht, however the price floor that the government has introduced has pushed the lowest price for rice up to 15,000 baht which is significantly higher than the previous price. This will cause the supply curve to shift to the right as shown in diagram 1 below.
The effect of the price floor is shown in diagram 2 below.
Before the government decided to add the price floor, the market equilibrium was at quantity Qe at the price Pe. The government decides to impose a minimum price of Pmin. This is done to increase the revenue of the farmers of rice, however this creates a new problem. At the new price of Pmin, only Q1 will be demanded, however Q2 will be supplied. If the government decides that it is not going to intervene any further, the quantity that is consumed will actually be reduced from Qe to Q1.
The excess supply that is generated will create problems. As the farmer whave an excess supply from Q1 to Q2. They will try to get rid of the stock, even if it means that they have to sell it at a price that is lower than the market price that is set by the government. To resolve this issue, the government needs to intervene and buy all the stock that cannot be sold. This will reduce the amount of surplus that exists in the market.
Rice is a staple good in Hong Kong; many families depend on rice to make up a majority of their diet.