Price Floors

The minimum legally allowable price for a good or service, set by the government. Sellers cannot charge a price lower than the price floor.

1. To provide income support for sellers by offering them prices for their products that are above market determined prices. 2. To protect low skilled, low wage workers by offering them a wage that is above the level determined by the market. 3. The Government may believe that a product is socially beneficial and impose a price floor to incentivise producers to supply more of the product.

The Qs is greater than the quantity demanded which results in a surplus of the good.

The market shrinks because the quantity demanded for the product decreases.

The high price allows inefficient firms with high costs of production to stay in buisness. They don't face incentives to cut costs by using more efficient production methods because the high price offers them protection from lower cost competitors.

Too many resources are allocated to the production of the good, which leads to more of the good being produced than the Optimum Quantity.

The govt has to spend money to buy the surplus which involves opportunity cost.

Worse off because they must pay a higher price and consumer surplus falls.

Better off because they receive a higher price and since the govt. buys the entire surplus their revenue increases.

Workers are better off as the increase in output will lead to a demand for more workers and higher employment.

The govt. is worse off because they have to purchase the surplus and then pay to store it.