Price Floor

Published Jan 19, 2023

Definition of Price Floor

A price floor is a government-imposed minimum price for a certain good or service. That means it is the lowest price at which a good or service can be legally sold. Price floors are usually used to protect producers from competition and to ensure that they receive a certain minimum price for their goods or services.

Example

A common example of a price floor is the minimum wage. In many countries, the government sets a minimum wage to protect workers from exploitation. That means employers are not allowed to pay their employees less than this minimum wage. As a result, the minimum wage acts as a price floor for labor.

Another example of a price floor is the minimum price for agricultural products. In many countries, the government sets a minimum price for certain agricultural and dairy products (e.g., milk) to protect farmers from competition. That means farmers are guaranteed to receive a certain minimum price for their products, regardless of market conditions.

Why Price Floors Matter

Price floors are an important tool for governments to protect certain industries or groups of people from exploitation. By setting a minimum price, the government can ensure that producers receive a certain minimum price for their goods or services. This can be beneficial for both producers and consumers. On the one hand, producers are protected from competition and can make a living. On the other hand, consumers can benefit from local producers that might otherwise go out of business because they could not keep up with their competition.

However, price floors can be controversial as well because they essentially limit competition. Liberal economists, in particular, tend to disapprove of such government interventions.