Explain how a Target price for farm crops is an example of a price floor.

1 answer:

8 0

Answer: A target price for farm crops is an example of price floor because it’s fixed ahead of harvests with the interest of farmers in mind.

Explanation: A quick definition of both concepts would be of help. A price floor is usually fixed by government legislation and it ensures that the price of a commodity or service does not fall below a certain minimum. In the case of farm crops, a floor price makes sure that the farmers are guaranteed a level of profit in case there is poor harvest for any reason whatsoever. The price floor must be fixed above the equilibrium price for this to be effective.

A target price is an expectation of the future price of commodities or services, and hence prices are fixed ahead of the harvest in the case of farm crops. This is so because as explained earlier, future conditions might change and become unfavorable, therefore making the current market price unprofitable for farmers. If for example, a sack of potatoes currently sells for $30, the government may fix the price floor ahead of the harvest season at $45 per sack. This implies that after harvesting farmers can still sell at $30. However if the harvest turns out to be bad perhaps due to natural disasters, pests or fungal attacks, etc, then the farmers can go ahead and sell at $45 and possibly higher. No farmer is allowed to sell below $45 (since that is the ‘floor’). That way, farmers would still have some profit guaranteed and would be encouraged to remain in the farming business.

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