Do Governments Earn Money On Price Floors

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. The most common example of a price floor is the minimum wage. Suppose the government sets the price of wheat at p f.

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A price floor is an established lower boundary on the price of a commodity in the market.

Do governments earn money on price floors.

What is the difference between price ceiling and price floor. A price ceiling means that producers can not raise the price while price floor means that producers can not cut the price below the assigned price. Price floors are used by the government to prevent prices from being too low. 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.

For a price floor to be effective the minimum price has to be higher than the equilibrium price. The most common price floor is the minimum wage the minimum price that can be payed for labor. Price floors are also used often in agriculture to try to protect farmers. 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.

A price floor that is set above the equilibrium price creates a surplus. Types of price floors. 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. Figure 4 8 price floors in wheat markets shows the market for wheat.

Why are price floors implemented by governments. A price floor is the lowest legal price a commodity can be sold at. A price floor must be higher than the equilibrium price in order to be effective. It is a kind of political pressure from suppliers to the government to keep the price high.

Notice that p f is above the equilibrium price of p e.