Minimum Price

A minimum price is set by the government to limit the price to a certain price level. It must be set above the market equilibrium price or it will have no effect.

The market equilibrium was at PQ, but after the intervention it creates a disequilibrium. Supply is at Q2 but demand is at Q1. This means that firms are willing to supply more than people are demanding, so there is likely to be a surplus.

Positives

• Reduce consumption of a negative product

Negatives

• Creates disequilibrium
• No revenue generated for the government
• Could create illegal markets
• Depends upon elasticity

Examples

• Alcohol (In Scotland)
• Agriculture (In EU) - Ensures that there is always spare supply and enough food for everyone. Some argue farmers' incomes are too low.