Government intervenes in the process of price determination through Price Floor.
Price Floor refers to the minimum price (above the equilibrium price), fixed by the government, Which the producers must be paid for their produce.
• Many a time government feels that the price fixed by the market forces of demand and supply is not remunerative from the producer’s point of view, then it fixes a price (known as price floor) which is more than the equilibrium price.
• The minimum support price is one of the examples of a price ceiling.
• Indian Government maintains a variety of price support programmes for various agricultural products like wheat, sugar cane etc. and the floor is normally set at a level higher than the market-determined price for these goods.
As seen in the diagram, equilibrium is determined at point E when demand curve DD and supply curve SS of wheat intersect each other. The equilibrium price of OP is determined.
• Suppose, to protect the producer’s interest and to provide an incentive for further production, , government declares OP2 as the minimum price (known as Price Floor) which is more than the equilibrium price of OP.
• The higher price lures the producers to produce more. This helps the government to maintain a buffer stock for exports.
