Minimum Price (Price Floor)

• Minimum price


  A fixed price or a price floor enacted by the government usually set above the equilibrium market price
• The government is saying the equilibrium price in the market is too low, so they want to raise it by implementing a minimum price
• Price floor


  The lowest price that can legally exist in the market
• Reasons for governments to use minimum prices


  • To protect producers from price volatility, especially farmers and producers of primary commodities
  • To solve market failures by raising price, discouraging consumption and production of goods/services that do harm to society
• Impact of minimum price

  1. Price increases

  2. Demand contracts

  3. Supply expands

  4. Excess supply (surplus) created
• Excess supply created


  Burden on producers as they have high costs but can only sell the lower quantity demanded
• Government intervention to address excess supply


  Intervention buying - government buys up the excess supply
• Cost of intervention buying

  Price of minimum price multiplied by the quantity of excess supply
• With intervention buying


  Producer revenue increases as they sell the full quantity supplied at the minimum price
• Without intervention buying


  Producer revenue only increases for the quantity demanded at the minimum price
• Minimum price creates a deadweight welfare loss
• Impact on stakeholders


  • Consumers - pay higher prices, consumer surplus eroded, regressive impact on low-income households
  • Producers - benefit if there is intervention buying, protected from price volatility
  • Government - concerned about cost of intervention buying, unintended consequences like black markets