Discuss another method to control price gouging apart from setting a
The price floor is another method to control price apart from the price ceiling. Government fixes the price ceiling to protect consumers for some goods. Similarly, a price floor is declared for some goods to protect producers.
PRICE FLOOR: For certain goods and services, a fall in prices below a particular level is not desirable, and hence the government sets floors or minimum prices for these services and goods. The government imposed a lower limit on the price charged for a particular service or good, called the Price floor. Examples for the imposition of price floor are agricultural price support programs and the minimum wage legislation.
The government imposes a lower limit on some agricultural products purchase price through an agricultural price support program. The floors are set normally at a level higher than the market-determined price for those goods. Similarly, through the minimum wage legislation, the government can ensure that the worker's wage rate does not fall below a particular level. The minimum wage rates are set above the equilibrium wage rate.
The diagram shows the market supply and the market demand curve for a product on which a price floor is imposed. The market equilibrium here occurs at price p* and quantity q*. But when the government imposes a floor higher than the equilibrium price at p1, the market demand is q1, whereas the firms want to supply q2, thereby leading to an excess supply in the market equal to q1q2.
Step by step
Solved in 3 steps with 1 images
