Do Governments Earn Money On Price Floors

Figure 4 8 price floors in wheat markets shows the market for wheat.

Do governments earn money on price floors. Why are price floors implemented by governments. Price floors are used by the government to prevent prices from being too low. For a price floor to be effective the minimum price has to be higher than the equilibrium price. A price floor is the lowest legal price a commodity can be sold at.

Governments usually set up a price floor in order to ensure that the market price of a commodity does not fall below a level that would threaten the financial existence of producers of the commodity. A price floor that is set above the equilibrium price creates a surplus. For example many governments intervene by establishing price floors to ensure that farmers make enough money by guaranteeing a minimum price that their goods can be sold for. What is the difference between price ceiling and price floor.

The most common price floor is the minimum wage the minimum price that can be payed for labor. Notice that p f is above the equilibrium price of p e. The most common example of a price floor is the minimum wage. A price floor must be higher than the equilibrium price in order to be effective.

Types of price floors. Suppose the government sets the price of wheat at p f. It is a kind of political pressure from suppliers to the government to keep the price high. Price floors are also used often in agriculture to try to protect farmers.

The equilibrium price commonly called the market price is the price where economic forces such as supply and demand are balanced and in the absence of external.