Price support is when a third party, usually the government, artificially raises the price of a product through subsidies and regulations. This goes against the free market system where prices are set by supply and demand. Price support is often used in agriculture to help smaller businesses survive.
A price support system is a situation where the price of a particular product is artificially boosted, 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 certain products and goods and imposes regulations to ensure that the price does not fall below a certain level. When price support exists, there is an exception to the free market capitalist system and the price of the goods in question is not set by the supply and demand curve as in a true free market.
Traditionally, economists have believed in letting the market set the price of a product through its demand. Economists believe that at some point on every supply and demand curve there is a perfect intersection where supply and demand are at their optimal levels. The provider would lose customers if it raised its rates, resulting in a loss, and it would also lose money if it lowered its rate. Therefore, this point about taking care of supply and demand is the price at which an item is sold in a free market system.
Sometimes, however, there is simply too much product and/or not enough demand for the product. In private companies and many industries, when this occurs, the company shuts down. Sometimes, however, the government will want to prevent a company or entity or group of entities from closing, for various reasons largely related to job creation.
When the government intervenes to set price support, it generally aims to make the market price of a good higher than it would be if the market price were fixed under the free market system. Therefore, it may be necessary to artificially create demand by paying farmers to destroy crops, in order to reduce the surplus of a given item. It may also be necessary to subsidize some of the cost of the high prices consumers pay for the item.
Proponents of price support believe small businesses need to be helped. Commonly, the concept of price support exists in agriculture. Proponents therefore argue that without price support, farmers would be required to sell their goods and items at such low cost that they could not survive on what they made from the sale. As the government provides price support, however, smaller companies are able to enter the field and stay afloat.
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