2.7.3 PRICE FLOORS

minimum price controls (price floors)

minimum prices set by the government that are set above the equilibrium price

purpose?

prevent sellers from selling their products too cheaply. used in labour and commodities

Aims

increase the income of important producers eg. local agricultural products

protect workers via minimum wage

consequences of floor price

• It produces surpluses.

• It promotes the creation of black markets.

• The government needs to dispose of the surplus.

• It might create firm inefficiency.

• It eliminates allocative efficiency and generates welfare loss.

• There are consequences for market stakeholders.