Government Set Price Floors

For a price floor to be effective it must be set above the equilibrium price.

Government set price floors.

Price floors are also used often in agriculture to try to protect farmers. Price floors are mostly introduced to protect the supplier. A price floor is a government set price above equilibrium price it is a tax on consumers and a subsidy to producers. Price floors transfer consumer surplus to producers.

Price floor is enforced with an only intention of assisting producers. When government laws regulate prices instead of letting market forces determine prices it is known as price control. Government set price floor when it believes that the producers are receiving unfair amount. In this case since the new price is higher the producers benefit.

Direct price setting in a command economy prices of goods may be set by the government. 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. Reasons for government price controls.

Price floor minimum price the lowest possible price set by the government that producers are allowed to charge consumers for the good service produced provided. With a price floor the government forbids a price below the minimum. A price floor if set above the market equilibrium price means consumers will be forced to pay more for that good or service than they would if prices were set on free market principles. For example the uk government set the price floor in the labor market for workers above the age of 25 at 7 83 per hour and for workers between the ages of 21 and 24 at 7 38 per hour.

A minimum allowable price set above the equilibrium price is a price floor. Food to increase revenue of farmers or discourage demand for demerit goods. Usually prices are set the market forces where supply and demand meet but there are various reasons governments may wish to intervene in a free market to set prices. However price floor has some adverse effects on the market.

It must be set above the equilibrium price to have any effect on the market. The price floors are established through minimum wage laws which set a lower limit for wages. More specifically it is defined as an intervention to raise market prices if the government feels the price is 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.

A price floor or a minimum price is a regulatory tool used by the government. If price floor is less than market equilibrium price then it has no impact on the economy.