can u explain what is price floor what is the cause what ar

can u explain what is price floor? what is the cause ? what are its effect? and what are the solution for this?

Solution

A price floor is the lowest price at which a commodity can be bought and it is fixed by the government to protect the producers. To make it effective, it must be fixed at a level higher than the equilibrium price. In general, price floor is the minimum wage--the minimum price that is paid to the labour. Price floors are also used often in agriculture to try to protect farmers.

Cause: Price Floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance.

Effect: (Image 1)

·        The impact of an effective price floor is generally surplus of inventory. A price floor acts as a safety net accessed only if the price falls low enough.

·        A price floor means consumers will be forced to pay more for that good or service than they would if prices were set on free market principles.

In Image 2, Without free trade interference, the natural market price for a candy bar is $1.00. When the government imposes a price floor of $1.50, the quantity supplied (17) exceeds the quantity demanded (5) by 12 units, resulting in a surplus of candy bars.

Image 1

Image 2