Question

What would be the impact of imposing a price floor below the equilibrium price?

Short answer

Price floors are set at a preset level above the equilibrium price to legally bind the pricing of products and services to a minimum, especially when the market determined equilibrium price is low.

Step-by-step solution

Step 1. Concept

Government intervention is used to set a price floor or price support to prevent prices from falling below a specified level.

Step2. Explanation

Price floors are set at a preset level above the equilibrium price to legally bind the pricing of products and services to a minimum, especially when the market determined equilibrium price is low. The government-set minimum wage is a good example.

When government fixes a price floor below the equilibrium level, it will have no impact as such as the prices will rise till the equilibrium price; virtually rendering the price floor useless as even without price floor, the prices would have rose till the equilibrium level.

This goes in line with the concept of price flooring as it only fixes a minimum level, if demand exists then the prices automatically rises to match the equilibrium.