A price floor is a limit on the price of a market commodity that has been set by the government. Governments typically impose a price floor to make sure that the market price of the commodity doesn’t really fall below a level that would risk the financial viability of the commodity’s producers.
Price floors are commonly established by governments to help manufacturers. In markets with inelastic demand and extremely low prices, governments automatically impose price floors. Because the benefit for manufacturers more than outweighs the loss of consumers, the government can raise general welfare in society.
The impact of a price floor on manufacturers is difficult to predict. As a result of the measure, producers may be better, no better, or worse off. The impact of a price floor on consumers, on the other hand, is more evident. Consumers never benefit from the policy; in fact, they may be worse off or no better off as a result of it.
The Effects of a Price Floor
- Consumers will seek out alternative goods if prices are greater than they would be in a market equilibrium.
- When price floors are placed higher than the equilibrium point, prices tend to rise.
- When prices are artificially set higher than market value, black markets emerge as manufacturers try to sell their excess production.
- When the price is above the equilibrium, suppliers are prepared to supply far more than what is required.