The Scenario:

Suppose that the market for good X is free and competitive, where the equilibrium price and quantity are $30 per ton and 10 million tons per year, respectively. The producers of good X complain to the government that the current market price is too low to provide them with sufficient income, and they want the government to set a price floor of $40 per ton and to purchase all resulting surplus in order to guarantee that the price support is maintained . Some government advisors are concerned by the fact that the elasticities of demand and supply for good X are unknown and therefore, this price support policy could be too costly for the government, and for consumers of good X in terms of the loss of consumer surplus.

Could the impact of the price floor on the consumers of good x (in terms of the loss of consumer surplus) be more than $100 million, or less than $100 million, or equal to $100 million? What conditions would your answer depend on ? Make some reference to elasticity. Explain your reason and illustrate a diagram using demand and supply curve.