Let’s Start With The Basics! Price Ceiling and Floor
Price flooring refers to a commodity’s minimum price for legally sold. The purpose of a price floor is to protect consumers from exploitation and to ensure a fair market for producers. In other words, the government or any other regulatory body sets a minimum price for a product or service to prevent the price from going too low, which would harm both consumers and producers.
What is Price Ceiling vs. Price Floor?
It’s essential to differentiate between a price ceiling and a price floor. A price ceiling refers to the maximum price that a commodity can legally be sold for. The government or any other regulatory body sets a total cost to prevent the market from exploiting consumers. On the other hand, a price floor refers to the minimum price a commodity can legally sell.
Why is Price Floors Used?
Price flooring is commonly used in various industries to protect consumers and producers. For example, in the agricultural sector, the government sets a minimum price for crops to ensure that farmers receive a fair price for their products and to prevent the costs from going too low, which would harm both consumers and producers. In the labor market, minimum wage laws serve as a price floor for labor, ensuring that workers receive a fair wage for their work.
Price flooring is also used in the healthcare industry to regulate the prices of drugs and medical procedures. The government sets a minimum price for medicines and medical procedures to prevent companies from exploiting consumers and to ensure that people receive the medical care they need.
Example of a Price Floor: Minimum Wage
One of the most well-known examples of a price floor is the minimum wage. The minimum wage is a legally mandated minimum price for labor, which means that workers cannot legally be paid less than the minimum wage. The purpose of the minimum wage is to protect workers from exploitation and ensure they receive a fair wage for their work.
In the United States, the federal minimum wage is currently $7.25 per hour. However, many states and cities have implemented higher minimum wages, with some cities, such as Seattle, having a minimum wage of $16 per hour.
The Impact of Price Flooring on the Market
While price flooring is designed to protect consumers and producers, it can also have unintended consequences on the market. For example, when a price floor is set above the market price, it can result in a surplus of the commodity in question. In the case of the minimum wage, a higher minimum wage than the market wage can result in unemployment as employers cannot afford to hire as many workers at a higher salary.
On the other hand, when a price floor is set too low, it can result in a shortage of the commodity. For example, if the government sets a minimum price for crops lower than the market price, farmers may not find it profitable to grow the crops, resulting in a shortage.
Price flooring is a tool used by governments and other regulatory bodies to protect consumers and producers. By setting a minimum price for a commodity, the government ensures that consumers receive a fair price and that producers receive a fair wage. The minimum wage is a well-known example of a price floor, and it protects workers from exploitation and ensures that they receive fair pay for their work.
While price flooring is designed to protect consumers and producers, it can also have unintended consequences on the market. Governments need to set the price floor at the right level to avoid surplus or shortage and ensure that the market remains fair for consumers and producers.