Do Governments Earn Money On Price Floors

It is a kind of political pressure from suppliers to the government to keep the price high.

Do governments earn money on price floors. A price floor is the lowest legal price a commodity can be sold at. The most common example of a price floor is the minimum wage. Suppose the government sets the price of wheat at p f. Types of price floors.

Price floors are used by the government to prevent prices from being too low. The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external. Figure 4 8 price floors in wheat markets shows the market for wheat. What is the difference between price ceiling and price floor.

For example many governments intervene by establishing price floors to ensure that farmers make enough money by guaranteeing a minimum price that their goods can be sold for. Notice that p f is above the equilibrium price of p e. 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 an established lower boundary on the price of a commodity in the market.

Price floors are also used often in agriculture to try to protect farmers. A price floor that is set above the equilibrium price creates a surplus. The most common price floor is the minimum wage the minimum price that can be payed for labor. A price floor must be higher than the equilibrium price in order to be effective.

For a price floor to be effective the minimum price has to be higher than the equilibrium price.