23- Minimum Prices

Question 1

Uses of minimum prices

Answer 1

Many countries have a minimum wage. In terms of commodities and food, a government may set a minimum guaranteed price (MGP) for a particular commodity. This means that producers know in advance that they will receive a certain price per kilo no matter how much is provided. This then acts as an incentive for producers to supply sufficient quantities of the commodity.

They might also be set by retailers in order to deter consumption. For example, Scotland plans to impose a minimum retail price for alocohol which is designed to make it less affordable and so reduce consumption

Question 2

Minimum Prices on a supply and demand diagram

Answer 2

• Straight line above the equilibrium
• Suppose the government sets a MGP above the equilibrium price, there will be a surplus of LM kilos
• The government will buy this surplus and store it for times in which there is a shortage

Question 3

Advantages on minimum prices or MGP

Answer 3

• Producers know in advance the price they will receive for their product
• This greater certainty enables producers to plan investment and output

Question 4

Disadvantages of minimum prices

Answer 4

• If the minimum guaranteed price is set too high, then there will be surpluses each year
• These schemes invlove costs of shortage which must be borne by tax payers
• These schemes encourage over production and may therefore result in an inefficient allocation of resources