What is a price floor?

A price floor is defined as a minimum price set by the government for a good or service. This intervention is typically enacted to ensure that the price does not fall below a level that would threaten the financial viability of producers. By establishing a price floor, the government aims to support suppliers, ensuring they can cover their costs of production and remain in business.

For example, a classic illustration of a price floor is seen in the agricultural sector, where minimum prices are put in place to help farmers maintain a stable income. When a price floor is set, it can lead to excess supply if the floor price is above the equilibrium price, as more producers are willing to supply the good at that higher price, but consumers may be less willing to purchase it, thus creating a surplus.

The other concepts presented do not accurately describe a price floor. A maximum price, for instance, refers to a ceiling set on prices, while market supply and demand determine equilibrium prices without government intervention. Lastly, a government tax serves a different purpose by manipulating prices through additional costs rather than establishing minimum prices for protection.