What is a price floor?

A price floor is a minimum price set by law that a good can be sold for, ensuring that prices do not drop below a certain level. This is often implemented by the government to protect producers' incomes, particularly in markets where prices might otherwise fall to levels that threaten the viability of businesses or farms. Price floors are commonly associated with agricultural products, where the government may want to ensure that farmers can cover their production costs and sustain their operations over time.

When a price floor is established, it can lead to a surplus if the minimum price is above the equilibrium price—the price at which supply and demand balance. In such cases, producers are willing to supply more of the good than consumers are willing to purchase at that higher price.