Question

Give an example of a situation where a government may choose to create a price floor or a price ceiling on a certain item or industry. Explain why you think the government might need to do this

Answer 1

The government sometimes intervene in the market of certain goods to either set a price floor or price ceiling (to regulate the market of that good).

For example, the government imposes a price floor on the market for labour. Sometimes the market forces of demand and supply set the wages in the market for labor too low. These low wages decrease the standard of living of the labours and make it hard for them to even afford the basic necessities. Thus, the government intervene in such a market and set a price floor above the equilibrium price (here above the equilibrium wage rate). The minimum wages are set above the market equilibrium wage rate and the labours are paid those minimum wages.

Sometimes it is necessary for the government to intervene the market for certain goods and set either a price floor or price ceiling so that there is no exploitation of the consumer or producer of that product and there is balance in the economy.