Question

What happens when a price floor is imposed above the equilibrium price of a good?

Answer 1

Price floors can have differing effects depending on other government policies. If the government agrees to purchase a specific maximum of unsold products at the price floor, it incentivizes a business to increase supply or at least to stay in the industry despite slow sales. Many governments do this for areas they see as strategically or politically significant, such as agriculture, or to prevent what they consider to be unfairly low prices of its products. If a foreign government sets a price floor for coffee beans, for example, and then agrees to buy the surplus up to a certain amount, it encourages growers to maintain their operations by placing an effective hedge against price fluctuations. If you own a small coffee shop, these price floors mean that you’re more likely to be able to find your imported beans, but you’ll pay more for them