Why Does The Government Set Price Floors

A government set minimum wage is a price floor on the price of labour.

Why does the government set price floors.

Price ceilings a price ceiling occurs when the government puts a legal limit on how high the price of a product can be. 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. Price floors are used by the government to prevent prices from being too low. When government laws regulate prices instead of letting market forces determine prices it is known as price control.

With a price floor the government forbids a price below the minimum. 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 minimum allowable price set above the equilibrium price is a price floor a minimum allowable price set above the equilibrium price. A minimum price is when the government don t allow prices to go below a certain level.

If minimum prices are set above the equilibrium it will cause an increase in prices. When a price ceiling is set a shortage occurs. The most common price floor is the minimum wage the minimum price that can be payed for labor. Types of price floors 1.

It is argued farmers incomes are too low. For example the eu has used minimum prices for agriculture. Governments often seek to assist farmers by setting price floors in agricultural markets. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result.

Price floors prevent a price from falling below a certain level. In order for a price ceiling to be effective it must be set below the natural market equilibrium. A local government for example might set a price floor on parking fees in a. 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. 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. For a price floor to be effective it must be set above the equilibrium price.

Governments impose a price floor because they judge the policy to have an effect more valuable than the consequences.