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A price floor is a government- or group-imposed
price control
Price controls are restrictions set in place and enforced by governments, on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of good ...
or limit on how low a price can be charged for a product, good, commodity, or service. A price floor must be higher than the
equilibrium price in order to be effective. The equilibrium price, commonly called the "market price", is the price where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change, often described as the point at which quantity demanded and quantity supplied are equal (in a perfectly competitive market). Governments use price floors to keep certain prices from going too low.
Two common price floors are
minimum wage law Minimum wage law is the body of law which prohibits employers from hiring employees or workers for less than a given hourly, daily or monthly minimum wage. More than 90% of all countries have some kind of minimum wage legislation.
History
Until r ...
s and
supply management in Canadian agriculture. Other price floors include regulated US airfares prior to 1978 and minimum price per-drink laws for alcohol. While price floors are often imposed by governments, there are also price floors which are implemented by non-governmental organizations such as companies, such as the practice of
resale price maintenance. With resale price maintenance, a
manufacturer
Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector of the economy. The term may refer to ...
and its
distributor
A distributor is an enclosed rotating switch used in spark-ignition internal combustion engines that have mechanically timed ignition. The distributor's main function is to route high voltage current from the ignition coil to the spark plug ...
s agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a
price ceiling
A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings ostensibly to protect consumers from conditions that could make com ...
(maximum resale price maintenance). A related government- or group-imposed intervention, which is also a price control, is the
price ceiling
A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings ostensibly to protect consumers from conditions that could make com ...
; it sets the maximum price that can legally be charged for a good or service, with a common government-imposed example being
rent control
Rent regulation is a system of laws, administered by a court or a public authority, which aims to ensure the affordability of housing and tenancies on the rental market for dwellings. Generally, a system of rent regulation involves:
*Price cont ...
.
Effectiveness
A price floor could be set below the
free-market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ot ...
equilibrium price. In the first graph at right, the dashed green line represents a price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears and is using a higher price.
By contrast, in the second graph, the dashed green line represents a price floor set above the free-market price. In this case, the price floor has a measurable impact on the market. It ensures prices stay high, causing a surplus in the market.
Effect on the market
A price floor set above the market equilibrium price has several side-effects.
Consumer
A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s find they must now pay a higher price for the same product. As a result, they reduce their purchases, switch to substitutes (e.g., from butter to margarine) or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before, but with fewer willing buyers.
Taken together, these effects mean there is now an excess supply (known as a "surplus") of the product in the market to maintain the price floor over the long term. The equilibrium price is determined when the quantity demanded is equal to the quantity supplied. Further, the effect of mandating a higher price transfers some of the
consumer surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities:
* Consumer surplus, or consumers' surplus, is the monetary gain ...
to
producer surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities:
* Consumer surplus, or consumers' surplus, is the monetary gain ...
, while creating a
deadweight loss
In economics, deadweight loss is the difference in production and consumption of any given product or service including government tax. The presence of deadweight loss is most commonly identified when the quantity produced ''relative'' to the amoun ...
as the price moves upward from the equilibrium price. A price floor may lead to
market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
if the market is not able to allocate scarce resources in an efficient manner.
Minimum wage
An example of a price floor is
minimum wage
A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century. B ...
laws, where the government sets out the minimum hourly rate that can be paid for labour. In this case, the wage is the price of labour, and employees are the ''suppliers'' of labor and the company is the ''consumer'' of employees' labour. When the minimum wage is set above the equilibrium market price for unskilled or low-skilled labour, employers hire fewer workers. Employers may cut their use of labour by switching to a "self-serve" model in which customers do an action previously done by staff (e.g., self-serve gas stations); or buying machines, computers or robots to do part or all of employees' jobs (e.g.,
automated teller machine
An automated teller machine (ATM) or cash machine (in British English) is an electronic telecommunications device that enables customers of financial institutions to perform financial transactions, such as cash withdrawals, deposits, fund ...
s in banks, automated ticket kiosks in parking garages).
Consequentially,
unemployment
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refe ...
is created (more people are looking for jobs than there are jobs available). At the same time, a minimum wage above the equilibrium wage would allow (or entice) more people to enter the
labor market because of the higher salary. The result is a surplus in the amount of labor available. The equilibrium wage for workers would be dependent upon their skill sets along with market conditions.
Agriculture
Previously, price floors in
agriculture
Agriculture or farming is the practice of cultivating plants and livestock. Agriculture was the key development in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that enabled people ...
have been common in
Europe
Europe is a large peninsula conventionally considered a continent in its own right because of its great physical size and the weight of its history and traditions. Europe is also considered a Continent#Subcontinents, subcontinent of Eurasia ...
. Since the 1999s, the EU has used a "softer" method: if the price falls below an
intervention price In agricultural policy, the intervention price is the price at which national intervention agencies in the EU are obliged to purchase any amount of a commodity offered to them regardless of the level of market prices (assuming that these commodities ...
, the EU buys enough of the product that the decrease in supply raises the price to the intervention price level. As a result of this, "
butter mountain
The butter mountain is a supply surplus of butter produced in the European Union because of government interventionism that began in the 1970s. The size of the surplus changed significantly over time and mostly disappeared by 2017, which has le ...
s" of surplus products in EU warehouses have sometimes resulted.
[Davig Begg, et al., ''Economics'', 4th edition, ]McGraw-Hill
McGraw Hill is an American educational publishing company and one of the "big three" educational publishers that publishes educational content, software, and services for pre-K through postgraduate education. The company also publishes refere ...
1994
Canada
In Canada,
supply management is a national agricultural policy framework that coordinates the supply of dairy, poultry, and eggs through production and import control and pricing mechanisms designed to prevent shortages and surpluses, to ensure farmers' rates of return and Canadian consumers' access to these products. With supply management, the Canadian "government sets a minimum price that processors have to pay the farmers, or a 'price floor.' Critics have argued that floor is artificially high, meaning dairy and other products cost more for Canadian consumers that they might otherwise."
Supply management's supporters say that the system offers stability for producers, processors, service providers and retailers.
[Larue, Bruno; Lambert, Rémy (2012). A Primer on the Economics of Supply Management and Food Supply Chains (PDF) (Report). Working Paper. Québec City, QC.: Structure and Performance of Agriculture and Agri-products industry Network (SPAA Network). p. 71. Retrieved June 29, 2018.] Detractors have criticized tariff-rate import quotas, price-control and supply-control mechanisms used by provincial and national governing agencies, organizations and committees. The policy has been described as regressive and
protectionist
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. ...
and costly with money transferred from consumers to producers through higher prices on milk, poultry and eggs which some label as a subsidy. Canada's trade partners posit that SM limits market access.
Canada's supply management system, which encompasses "five types of products: dairy, chicken and turkey products, table eggs, and broiler hatching eggs", "coordinates production and demand while controlling imports as a means of setting stable prices for both farmers and consumers."
The
Fraser Institute
The Fraser Institute is a libertarian-conservative Canadian public policy think tank and registered charity. The institute describes itself as independent and non-partisan. It is headquartered in Vancouver, with additional offices in Calgary, ...
,
C.D. Howe
Clarence Decatur Howe, (15 January 1886 – 31 December 1960) was an American-born Canadian engineer, businessman and Liberal Party politician. Howe served as a cabinet minister in the governments of prime ministers William Lyon Mackenzie ...
,
Atlantic Institute for Market Studies (AIMS), the
Montreal Economic Institute
The Montreal Economic Institute (MEI) is a non-profit research organization (or think tank) based in Montreal, Quebec, Canada. It aims at promoting economic liberalism through economic education of the general public and what it regards as effici ...
(MEI),
Frontier Centre for Public Policy
The Frontier Centre for Public Policy (FCPP) is a Canadian public policy think tank, founded to undertake research and education projects in support of economic growth and social outcomes that enhance quality of life. 2012 Annual Report http://ww ...
, and the
School of Public Policy, University of Calgary
The School of Public Policy is an institute at the University of Calgary located in Calgary, Alberta, Canada. Founded in 2008, The school is devoted to public policy research and education, and is led by Pierre-Gerlier Forest. Located at the Unive ...
have called for the elimination of supply management.
A 2017 study from the
University of Toronto
The University of Toronto (UToronto or U of T) is a public research university in Toronto, Ontario, Canada, located on the grounds that surround Queen's Park. It was founded by royal charter in 1827 as King's College, the first institution ...
estimated that the higher consumer prices that are attributable to supply management push between 133,000 and 189,000 Canadians below the poverty line.
Minimum Support Price
India
Minimum support price (India)
The minimum support price (MSP) is an advisory price signal that is part of a larger set of agricultural policies in parts of India. This informal "support" price (as opposed to procurement or issue price) is recommended by the government and ai ...
is a government intervention policy program. The farmers are paid prices above market determined rates to help them. Support prices helped India gain food security during period of
Green Revolution in India
Alcohol
Scotland
In
Scotland
Scotland (, ) is a country that is part of the United Kingdom. Covering the northern third of the island of Great Britain, mainland Scotland has a border with England to the southeast and is otherwise surrounded by the Atlantic Ocean to the ...
, the government passed a law that sets out a price floor on alcoholic beverages. The ''
Alcohol (Minimum Pricing) (Scotland) Act 2012
The Alcohol (Minimum Pricing) (Scotland) Act 2012 is an Act of the Scottish Parliament, which introduces a statutory minimum price for alcohol, initially 50p per unit, as an element in the programme to counter alcohol problems.
The Act was passed ...
'' is an
Act of the Scottish Parliament
An Act of the Scottish Parliament ( gd, Achd Pàrlamaid na h-Alba) is primary legislation made by the Scottish Parliament. The power to create Acts was conferred to the Parliament by section 28 of the Scotland Act 1998 following the successfu ...
, which introduces a
statutory
A statute is a formal written enactment of a legislative authority that governs the legal entities of a city, state, or country by way of consent. Typically, statutes command or prohibit something, or declare policy. Statutes are rules made by le ...
minimum price for alcohol, initially 50p per
unit
Unit may refer to:
Arts and entertainment
* UNIT, a fictional military organization in the science fiction television series ''Doctor Who''
* Unit of action, a discrete piece of action (or beat) in a theatrical presentation
Music
* ''Unit'' (alb ...
, as an element in the programme to counter
alcohol problems
Alcoholism is, broadly, any drinking of alcohol that results in significant mental or physical health problems. Because there is disagreement on the definition of the word ''alcoholism'', it is not a recognized diagnostic entity. Predomina ...
. The government introduced the Act to discourage excessive drinking. As a price floor, the Act is expected to increase the cost of the lowest-cost alcoholic beverages, such as bargain-priced cider. The Act was passed with the support of the
Scottish National Party
The Scottish National Party (SNP; sco, Scots National Pairty, gd, Pàrtaidh Nàiseanta na h-Alba ) is a Scottish nationalist and social democratic political party in Scotland. The SNP supports and campaigns for Scottish independence from ...
, the
Conservatives
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization in ...
, the
Liberal Democrats and the
Greens. The opposition,
Scottish Labour
Scottish Labour ( gd, Pàrtaidh Làbarach na h-Alba, sco, Scots Labour Pairty; officially the Scottish Labour Party) is a social democratic political party in Scotland. It is an autonomous section of the UK Labour Party. From their peak of ...
, refused to support the legislation because the Act failed to claw back an estimated £125m
windfall profit from alcohol retailers.
Australia
A review in October 2017 by former chief justice
Trevor Riley
Trevor John Riley (born 29 January 1948) was the Chief Justice of the Supreme Court of the Northern Territory in Australia. He was appointed a judge of the Supreme Court on 1 February 1999, Chief Justice on 27 September 2010 and retired on 4 ...
brought about huge changes to policy in the
Northern Territory
The Northern Territory (commonly abbreviated as NT; formally the Northern Territory of Australia) is an states and territories of Australia, Australian territory in the central and central northern regions of Australia. The Northern Territory ...
, Australia, where
alcohol-fuelled crime has long been a problem. The 220 recommendations included a floor price for all alcohol products at per
standard drink
A standard drink is a measure of alcohol consumption representing a hypothetical beverage which contains a fixed amount of pure alcohol. A standard drink varies in volume depending on the alcohol concentration of the beverage (for example, a sta ...
. In the 10 months between 1 October 2018, the date that the floor price and other measures were imposed by the NT government, and 31 July 2019, there was a 26% decrease in alcohol-related assaults in the Territory.
Republic of Ireland
In 2022, minimum unit pricing (MUP; ) was introduced in the
Republic of Ireland
Ireland ( ga, Éire ), also known as the Republic of Ireland (), is a country in north-western Europe consisting of 26 of the 32 counties of the island of Ireland. The capital and largest city is Dublin, on the eastern side of the island. A ...
, at €0.10 per gram of alcohol. This meant that some of the cheapest forms of alcohol rose substantially in price: a 700 mL bottle of 37.5% spirits would cost a minimum of €20.71, whereas before MUP it was available for €13 or less. A bottle of wine cost over €7, whereas previously the cheapest wine was available for less than €5. A 500 mL can of cider or beer would now sell for €1.66 or more, depending on strength; prior to this, some cans were available for less than one euro.
MUP is not a tax; most of the price increase goes directly to retailers, with the state collecting some
value-added tax
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end ...
. Vincent Jennings, chief executive of the Convenience Stores and Newsagents Association criticised the change, saying that it would increase purchases over the
Irish border
Irish may refer to:
Common meanings
* Someone or something of, from, or related to:
** Ireland, an island situated off the north-western coast of continental Europe
***Éire, Irish language name for the isle
** Northern Ireland, a constituent unit ...
in
Northern Ireland
Northern Ireland ( ga, Tuaisceart Éireann ; sco, label= Ulster-Scots, Norlin Airlann) is a part of the United Kingdom, situated in the north-east of the island of Ireland, that is variously described as a country, province or region. Nort ...
, and pointing out that MUP did not apply to
duty-free
A duty-free shop (or store) is a retail outlet whose goods are exempt from the payment of certain local or national taxes and duties, on the requirement that the goods sold will be sold to travelers who will take them out of the country, w ...
alcohol.
The
Health Service Executive
The Health Service Executive (HSE) ( ga, Feidhmeannacht na Seirbhíse Sláinte) is the publicly funded healthcare system in Ireland, responsible for the provision of health and personal social services. It came into operation on 1 January 2005 ...
justified the move on public-health grounds, claiming that "The heaviest drinkers buy the cheapest alcohol. Minimum unit pricing on alcohol targets these drinkers, reducing its affordability so that less alcohol is purchased. This will reduce the harm that alcohol causes them and others. This should result in around 200 fewer
alcohol-related deaths and 6,000 fewer hospital admissions per year."
Neil Fetherstonhaugh of the ''
Sunday World
The ''Sunday World'' is an Irish newspaper published by Independent News & Media. It is the second largest selling "popular" newspaper in the Republic of Ireland, and is also sold in Northern Ireland where a modified edition with more stories r ...
'' criticised MUP, saying that it would disproportionately impact those on low incomes.
TheJournal.ie
''TheJournal.ie'' is an internet publication in Ireland. It was a mixture of original and aggregated content, before moving to entirely original content. The website was founded in early 2010.
It was edited by Jennifer O'Connell in 2010–2011, ...
also criticised MUP in its FactCheck section, saying that it was not proven to work in British Columbia, saying "there is little or no scientific evidence establishing an observed link between minimum unit pricing and declining health harms."
Carbon pricing
Carbon pricing
Carbon pricing (or pricing), also known as cap and trade (CAT) or emissions trading scheme (ETS), is a method for nations to reduce global warming. The cost is applied to greenhouse gas emissions in order to encourage polluters to reduce the co ...
is being implemented by governments to reduce the use of carbon fuels. Carbon pricing can be determined by specific policies such as taxes or caps or by commitments such as emission reduction commitments or price commitments. However, emission reduction commitments (used by the Kyoto Protocol) can be met by non-price policies, so they do not necessarily determine a carbon price. Carbon policies can be either price-based (taxes) or quantity-based (
cap and trade
Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. The concept is also known as cap and trade (CAT) or emissions trading scheme (ETS). Carbon emission t ...
). A cap-and-trade system is quantity-based because the regulator sets an emissions quantity cap and the market determines the carbon price.
The IMF’s Fact Sheet states that “Cap-and-trade systems are another option, but generally they should be designed to look like taxes through revenue-raising and
price stability Price stability is a goal of monetary and fiscal policy aiming to support sustainable rates of economic activity. Policy is set to maintain a very low rate of inflation or deflation. For example, the European Central Bank (ECB) describes price s ...
provisions." Such designs are often referred to as hybrid designs. The stability provisions referred to are typically floor and ceiling prices (a ceiling price is also known as a safety valve), which are implemented as follows. When permits are auctioned, there is a floor (reserve) price below which permits are not sold, and permits for immediate use are always made available at the ceiling price, even if sales have already reached the permit cap. To the extent the price is controlled by these limits, it is a tax. So if the floor is set equal to the ceiling, cap-and-trade becomes a pure carbon tax.
US airfare before 1978
![N108BN B707-138B Braniff Intl JFK 14JUL70 (6053389428)](https://upload.wikimedia.org/wikipedia/commons/9/96/N108BN_B707-138B_Braniff_Intl_JFK_14JUL70_%286053389428%29.jpg)
Until the late 1970s, government regulated price floors on airfares in the US made flying "absurdly expensive" to the point that in 1965, more than 80% of Americans had never flown on a jet.
For example, in 1974, US air carriers had to charge at least $1,442 (in inflation-adjusted dollars) for a New York City to Los Angeles trip, a flight that cost as little as $278 in 2013.
In 1978, the US government deregulated airfares, on the grounds that flying is not a necessity (like food or prescription drugs), and nor was it addictive (like alcohol). The government deregulated airfares so that increased competition would lead to a drop in airfare prices. By 2011, the inflation-adjusted cost of air travel dropped by half as compared with 1978. By 2000, half of Americans were taking at least one round-trip air flight per year.
Private sector
While the setting of price floors is often associated with government measures, there are also private sector-imposed price floors. Until November 2016, the
National Football League
The National Football League (NFL) is a professional American football league that consists of 32 teams, divided equally between the American Football Conference (AFC) and the National Football Conference (NFC). The NFL is one of the ...
(NFL) set a price floor on tickets that were sold on league websites, a practice which a 2016 court case found to be in violation of US
antitrust
Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust l ...
laws.
The price floors were introduced when teams sought to prevent "...season-ticket holders from selling tickets at prices below face value."
In 2013, the New York Yankees and Los Angeles Angels of Anaheim declined to participate in
Major League Baseball
Major League Baseball (MLB) is a professional baseball organization and the oldest major professional sports league in the world. MLB is composed of 30 total teams, divided equally between the National League (NL) and the American League (AL), ...
ticket sales through
StubHub
StubHub is an American ticket exchange and resale company. It provides services for buyers and sellers of tickets for sports, concerts, theater, and other live entertainment events. It is the world's largest ticket marketplace. While the company ...
because this online ticket resale website did not allow teams to put a price floor in place.
See also
*
Price ceiling
A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings ostensibly to protect consumers from conditions that could make com ...
*
Supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
*
General equilibrium
In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an ov ...
*
Resale price maintenance
Resale price maintenance (RPM) or, occasionally, retail price maintenance is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), a ...
References
Further reading
*
{{Authority control
Price controls