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Would someone be able to explain this graph? I understand that it shows a demerit good and that alcohol is being overconsumed in the free-market and at Q1 it is then at the socially efficient point where MSB = MSC. This movement is done by the minimum price incentivising people to stop as prices are much higher. This creates a surplus etc. However, what I don't get is how the new equilibrium is at Q1 if suppliers cant sells at that price as it is below the minimum price. Any help would be much appreciated. I feel like I am overcomplicating it. enter image description here

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    $\begingroup$ The equilibrium with price floor is at point $(Q_1,P_1)$, not $(Q_1,P)$. $\endgroup$
    – Herr K.
    Commented Apr 19, 2022 at 21:03
  • $\begingroup$ @HerrK. Add "in its simplest form an equilibrium is a (quantity,price) pair" and post this as the answer? $\endgroup$
    – Giskard
    Commented Apr 20, 2022 at 2:32

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The following is just an extended version of Herr K.'s comment above...:

Without the minimum price, the equilibrium quantity is the one where supply (the blue MPC line) and demand (the red MPB line) coincide, which is Q in the graph. But the socially optimal quantity is the one where supply and MSB coincide, which is Q1. To make that quantity an equilibrium quantity, you have to shift either the supply curve or the demand curve.

Since you cannot easily shift the demand curve, you shift the supply curve by introducing a minimum price such that demand at that minimum price is equal to Q1. This is achieved by setting the minimum price at P1. The resulting new supply curve is sketched in light blue in the graph below, with the black dot as the new equilibrium (Q1,P1).

Equilibrium with a minimum price

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