Course

Price Floors

Instructor: Alex Tabarrok, George Mason University

Price Floor : The minimum price allowed for a given good, set by government. This is from the video “ Price Floors: Minimum Wage ” in the Principles of

Price Floor: The minimum price allowed for a given good, set by government. This is from the video “Price Floors: Minimum Wage” in the Principles of Microeconomics course.

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Transcript

A price floor is a minimum price allowed by law. That is, it is a price below, which it is illegal to buy or sell, called a price floor because you cannot go below the floor. We're going to show that price floors create four significant effects: surpluses, lost gains from trade, wasteful increases in quality, and a misallocation of resources. We're going to go through these each in turn.


Before we do so, however, it is worthwhile asking this question: price floors are less common than price ceilings - why is this? That is, it's more common to see a price being held below the market price, than it is to see a price being held above the market price. Why? One reason may be political. That is, there are typically more buyers of goods than there are sellers of goods. So, when you hold a price below the market price, you may benefit, or at least appear to benefit, more buyers, more people, more voters than when you hold a price above the market price, which would appear to harm buyers.


Now interestingly, the paradigmatic, the classic case of a price floor is the exception, which proves the rule. Because the classic case of a price floor is a good, for which there are more sellers than there are buyers. So, here's the case where the price is kept above the market price, and it make sense politically because there are lots of sellers compared to buyers. So, what is this good for which price floor is common, and for which sellers exceed buyers? We'll get to that in just a moment.

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