What is the purpose of price floors?

The purpose of price floors is to ensure that prices do not fall below a certain level, which is primarily aimed at protecting producers of a good or service. By setting a minimum price for a product, a price floor helps to maintain stable incomes for those producers, especially in markets where prices can fluctuate significantly due to varying demand and supply conditions.

For example, in agricultural markets, a price floor might be established to ensure that farmers can cover their production costs and sustain their livelihoods. If prices were allowed to drop too low, it could lead to significant economic distress for these producers, potentially causing them to exit the market, resulting in reduced supply in the future.

Implementation of price floors can also have broader economic implications, such as surplus production when the minimum price is above the market equilibrium price, leading to potential waste or need for government intervention to purchase the excess supply. This contrasts with maximum prices, which are aimed at keeping essential goods affordable and preventing shortages, or the idea of eliminating black market pricing, which is focused on addressing illegal market activities, not directly linked to price floor policy.