Price Floor

Governments set price floors to protect producers or workers from prices they consider too low. Common examples include minimum wages, which set a floor on the price of labour, and minimum prices for certain agricultural products.

A price floor only has an effect if it is set above the equilibrium price. At the higher price, producers want to sell more but buyers want to buy less, creating a surplus.

For example, if the market price of milk is 0.80 per litre and the government sets a minimum price of 1.00, farmers will want to produce more milk, but consumers will buy less. The extra milk may go unsold unless the government buys it, which has led to stockpiles of products in some countries in the past.

Price floors can raise incomes for some producers, but they can also cause waste, higher prices for consumers and deadweight loss. With minimum wages, the debate centres on how much they raise workers' pay compared with any effect on employment, which depends on the level of the minimum wage and the labour market.