What is a price floor?

A price floor is defined as a government-imposed limit on how low a price can be charged for a product. This is typically established to ensure that producers receive a minimum income for their goods or services, preventing market prices from falling below a certain level.

For example, in agricultural markets, governments may set price floors to protect farmers from volatile price drops. If the market price of a staple crop falls below this established floor, the government may step in to purchase surplus crops at the floor price, stabilizing income for farmers.

This mechanism can lead to excess supply, as some producers may be incentivized to produce more than what consumers are willing to buy at the higher price, highlighting how price floors influence market dynamics.