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Question
Answer the following question.
Define Price Floor. State the likely consequence of this type of intervention by the government.
Solution
Price floor implies legislated or government fixed minimum price that should be charged by the seller. The minimum price is fixed above the equilibrium price.
The likely consequences of this type of intervention by the government are:
- Assurance to the Farmers - The imposition of the price floor assures the farmers that whatever they produce will get sold in the market. This implies that the farmers can produce to their maximum.
- Assurance of Returns - Due to the price floor, the farmers need not to bother about the sale of their output. This ensures a minimum guaranteed return to their investment in the production process.
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