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Ineconomics, aprice support may be either asubsidy, a production quota, or aprice floor, each with the intended effect of keeping the marketprice 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 certainprice 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 aprice 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.
In a hypothetical market in whichsupply and demand are such that theequilibrium price and quantity are $5 and 500 units, respectively, and the government then institutes an "intervention price" at $6 per unit:
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The benefit to producers of the price support is equal to the gain inproducer surplus (represented in blue).
The cost to consumers of the price support is equal to the loss inconsumer surplus (represented in red).
The cost to the government of the price support is equal to the cost of the surplus in the market (represented in gray).
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.
In other words, consumers are paying$1650 in order to benefit producers$550 so price supports are considered inefficient.
Thedeadweight loss is the efficiency lost by implementing the price-support system. It is the change in total surplus and includes the value of the government purchase, and is equal to $1100.
