Why Does The Government Set Price Floors

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

Why does the government set price floors.

This is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times. For example the eu has used minimum prices for agriculture. Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage the minimum price that can be payed for labor.

A minimum allowable price set above the equilibrium price is a price floor. A minimum price is when the government don t allow prices to go below a certain level. When a price ceiling is set a shortage occurs. A government set minimum wage is a price floor on the price of labour.

Price floors prevent a price from falling below a certain level. For a price floor to be effective it must be set above the equilibrium price. Governments often seek to assist farmers by setting price floors in agricultural markets. Types of price floors 1.

With a price floor the government forbids a price below the minimum. If minimum prices are set above the equilibrium it will cause an increase in prices. Price ceilings a price ceiling occurs when the government puts a legal limit on how high the price of a product can be. Price floors are also used often in agriculture to try to protect farmers.

It is argued farmers incomes are too low. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. In order for a price ceiling to be effective it must be set below the natural market equilibrium. A minimum allowable price set above the equilibrium price is a price floor a minimum allowable price set above the equilibrium price.

When government laws regulate prices instead of letting market forces determine prices it is known as price control. Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity. 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. Governments impose a price floor because they judge the policy to have an effect more valuable than the consequences.

Governments often seek to assist farmers by setting price floors in agricultural markets.