Question

In: Economics

What is a government price floor? Who benefits from the floor? Who pays the cost of...

  1. What is a government price floor? Who benefits from the floor? Who pays the cost of the floor?

Solutions

Expert Solution

A price floor is the lowest legal price that can be charged for goods and services, labor or finance resources in a market. Maybe the best known example of a price floor is the minimum wage, which is based on the common belief that someone who works full time should be able to afford a basic living standard. At the end of 2014, the federal minimum wage was $7.25 per hour which yields a slightly higher income for a single person than the poverty line. With the cost of living increasing over time, Congress increases the federal minimum wage annually.

Price floors are sometimes referred to as price supports because they sustain a market by keeping it from dropping below a certain amount. Most countries around the world have passed legislation providing subsidies for agricultural prices. Farm values, and therefore farm incomes, fluctuate— sometimes widespread. So even if farm incomes are sufficient on average, they can be fairly low for some years. Price supports are intended to prevent such swings.
The most common way in which price supports work is for the government to enter the market and buy the product, contributing to the demand to keep prices higher than they would otherwise be

Neither price ceilings nor price floors are responsible for changing demand or supply. They just set a price limiting what can be charged legally on the market. Price changes do not cause a change in demand or supply. Price ceilings and price floors can result in a specific quantity selection required along a demand curve but they do not push the demand curve. Price controls can trigger a different quantity option delivered along a supply curve, but they do not change the supply curve.


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