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Implications of price floor

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A price floor is the lowest legal price that can be paid in a market for goods and services, labor, or financial capital. Perhaps the best-known example of a price floor is the minimum wage, which is based on the normative view that someone working full time ought to be able to afford a basic standard of living.

Price floors are sometimes called price supports because they support a price by preventing it from falling below a certain level.

Price floors prevent a price from falling below a certain level.

When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result.

When government laws regulate prices instead of letting market forces determine prices, it is known as price control.

Effects of Price Floor: 

(i) Minimum Return: Farmers are ensured with the minimum returns as their products are completely sold in the market at comparatively higher price. This leads to an increase in their level of income. 

(ii) Maximum Level of output: The government ensures to buy the full produce of the farmers which are not sold in the market at the price floor. Hence, they are able to produce the maximum level of output. 

(iii) Burden on Government: It also puts extra burden on the government revenues. It becomes mandatory for the government to purchase the excess produce, even if it runs a sufficient volume of buffer stocks. 

(iv) Higher Taxes: The government also tries to shift the burden (associated with purchasing the excess produce at higher price) to the consumers and the traders in form of higher taxes.

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