Answer:
Price floor implies legislated or government fixed minimum price that should be charged by the seller. Since price floor is above the equilibrium price (\[O{{P}_{e}}\]), thus the imposition of the price floor leads to excess supply as shows in the diagram below.
Assurance to the farmers: The imposition of the price floor assures the farmers that, whatever they produce will get sold in the market. This implies that the farmers can produce to their maximum.
Assurance of returns: Due to the price floor, the farmers need not to bother about the sale of their output. This ensures a minimum guaranteed return to their investment in the production process.
Higher income: The minimum guaranteed returns in form of minimum price and minimum wage to labourers, result in increase in the income of the poor people.
Burden on consumers: Price floor exerts additional pressure on the consumers and the traders, as they need to buy the products at comparatively higher price (\[O{{P}_{c}}\] in the figure) instead of the equilibrium price (\[O{{P}_{e}}\]).
Burden on government: It also puts extra burden on the government revenues. It becomes mandatory for the government to purchase the excess produce, even if it runs a sufficient volume of buffer stocks.
Higher taxes: The government tries to shift the burden (associated with purchasing the excess produce at higher price) to the consumers and the traders in form of higher taxes.
You need to login to perform this action.
You will be redirected in
3 sec
