Profile
Settings
Refer your friends
Sign out
The imposition of control on prices of goods and commodities by the governments or a group of organisations is called a price floor. A price floor is only effective when it is higher than the equilibrium price. The equilibrium price is also known as ‘market price’. At market price, the demand and supply are balanced. Generally, governments decide the price floor to prevent a commodity’s market price from falling below a level that can threaten a producer’s financial existence.
What are the Various Types of Price Floor?
Binding Price Floor: A binding price floor is a price floor that is greater than the equilibrium market price. When the government sets a minimum price of a good or commodity above equilibrium, a binding price floor occurs. It happens when the government itself wants to prevent a commodity’s price drop. When the government inflates the price artificially, some consumers decline to pay that minimum price. This, in turn, results in a surplus of that good or commodity. The governments can also mark it illegal to sell a good or commodity below the price floor.
Non-Binding Price Floor: Non–Binding price floor is a price floor that is lower than the equilibrium market price. The non-Binding price floor is a price ceiling that does not affect the market price. When the price ceiling level is equal to or greater than the equilibrium price, it is called a non-binding price-ceiling that will be available in an unregulated market. In the non-binding price floor, only price control is non-binding, but there is neither any surplus nor a shortage.
What is the Effect of Price Floors on Consumers and Producers?
The price floors’ effect on consumers is straightforward. Consumers do not gain anything from the measure. They remain unaffected by this measure.
The price floor’s effect on the producer is ambiguous. Some producers can gain from price floors, while some can lose.
Why are Price floors set up?
To assist goods producers, the government set up a price floor. For example, if the government wants to encourage the production of coffee beans, it may introduce a price floor for coffee beans.
What Are the Differences Between Price Floor And Price Ceiling?
Price floor and price ceiling are the two price control mechanisms. Price control mechanisms mean the government-enacted laws that regulate the prices in the market. The main points of difference between the Price floor and price ceiling are the following:
Conclusion
In a nutshell, a price floor is a price control method in which the price of any good is prevented from dropping below a definite level. A price floor is of two types, binding price floor and non-binding price floor. When the price floor is greater than the equilibrium market price, it is called a binding price floor. On the other hand, when the price floor is lower than the equilibrium market price, it is called a non-binding price floor. One of the common examples of a price floor is minimum wages. The price floor creates a surplus or excess of goods in the market.
