What is a price floor?

A price floor is a minimum price set by law that a good can be sold for. This regulatory measure is typically implemented by governments to ensure that prices do not fall below a level that would threaten the financial viability of producers, particularly in markets for essential goods or services, such as agriculture.

For instance, if a government establishes a price floor for a particular agricultural product, this means that farmers will receive a price at or above this minimum threshold, which helps them cover their costs and continue producing. Implementing a price floor can also have implications for supply and demand; if the minimum price is set above the equilibrium price, it may lead to surplus supply as producers are willing to supply more than what consumers are willing to buy at that higher price.

Understanding a price floor is crucial in economics because it highlights how government interventions can influence market dynamics and the distribution of resources.