Government Price Floor

Figure 4 6 price floors in wheat markets shows the market for wheat.

Government price floor.

A price floor is the lowest legal price a commodity can be sold at. The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external. A price floor or a minimum price is a regulatory tool used by the government. A price floor is a government or group imposed price control or limit on how low a price can be charged for a product good commodity or service.

If the government agrees to purchase a specific maximum of unsold products at the price floor it. Price floors and ceilings are inherently inefficient and lead to sub optimal consumer and producer surpluses but. Price floors can have differing effects depending on other government policies. More specifically it is defined as an intervention to raise market prices if the government feels the price is too low.

Price floors and price ceilings are government imposed minimums and maximums on the price of certain goods or services. The most common price floor is the minimum wage the minimum price that can be payed for labor. A price floor is the lowest price that one can legally charge for some good or service. At price pf consumer demand is qd less than q due to downward sloping demand curve demand curve the demand curve is a line that shows how many units of a good or service will be purchased at different prices.

In this case since the new price is higher the producers benefit. Therefore prices in the market can t fall below pf. Suppose the government sets the price of wheat at p f. Price floors are also used often in agriculture to try to protect farmers.

This is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times. A price floor must be higher than the equilibrium price in order to be effective. Notice that p f is above the equilibrium price of p e. A price floor that is set above the equilibrium price creates a surplus.

Perhaps the best known example of a price floor is the minimum wage which is based on the view that someone working full time should be able to afford a basic standard of living. Price floors are used by the government to prevent prices from being too low.