What is Price Support?

A price support system is a situation in which the price of a given product is artificially bolstered, raised or manipulated through the actions of a third party. Most often, the third party involved is the government, as the government provides subsidies on some products and goods and imposes regulations to ensure the price does not dip below a certain level. When price support exists, an exception to the free market capitalistic system exists, and the price of the goods in question are not set by the supply and demand curve as it is in a true free market.

Traditionally, economists believe in letting the market set the price of a product through its demand for it. Economists believe that at some point on every supply and demand curve there is a perfect intersection wherein supply and demand are at their optimal levels. The supplier would lose customers if he raised his rates, resulting in a loss, and he would also lose money if he lowered his rate. As such, this point on the supply and demand cure is the price at which an item is sold in a free market system.

Sometimes, however, there is simply too much of a product and/or not enough demand for the product. In private businesses and many industries, when this occurs, the company closes. Sometimes, however, the government will wish to preclude a company or entity or group of entities from closing, for various reasons largely related to the creation of jobs.

When the government steps in to set price support, it generally aims to make the market price of a good higher than it would be if the market price was set in the free market system. As such, it may have to artificially create demand by paying farmers to destroy crops so there is less of a surplus of a given item. It may also have to subsidize part of the cost of the high prices paid by consumers for the item.

Advocates of price support believe it is necessary to help small business people. Commonly, the concept of price support exists in farming. Advocates therefore argue that without price support, farmers would be required to sell their goods and items for such a low cost that they would be unable to survive on what they made from the sale. Because the government provides price support, however, the smaller companies are able to enter the field and stay afloat.