Government Price Floor

Price floors and price ceilings are government imposed minimums and maximums on the price of certain goods or services.

Government price floor.

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. A price floor is the lowest legal price a commodity can be sold at. Price floors are also used often in agriculture to try to protect farmers.

Suppose the government sets the price of wheat at p f. If the government agrees to purchase a specific maximum of unsold products at the price floor it. More specifically it is defined as an intervention to raise market prices if the government feels the price is too low. 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.

A minimum allowable price set above the equilibrium price is a price floor with a price floor the government forbids a price below the minimum. Governments often seek to assist farmers by setting price floors in agricultural markets. This is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times. 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.

The most common price floor is the minimum wage the minimum price that can be payed for labor. 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 that is set above the equilibrium price creates a surplus. 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.

A price floor or a minimum price is a regulatory tool used by the government. Notice that p f is above the equilibrium price of p e. A price floor must be higher than the equilibrium price in order to be effective. The government establishes a price floor of pf.

In this case since the new price is higher the producers benefit. Figure 4 6 price floors in wheat markets shows the market for wheat.