Binding price floor definition.


In economics, a binding price floor is a government set of a mandatory minimum price for a particular product or products at a price higher than the equilibrium level. Since the price cannot drop below this level, such a regulation restricts the freedom of the market and has certain effects on it.


Since the government artificially decreases the price, many consumers may refuse to purchase the product at a price above the equilibrium, thus creating a producer surplus. If the state does not take any additional measures, then supply is likely to decrease along with the decreased demand, as the unrealized surplus is not profitable for any producer.

However, the government sometimes takes such measures, for example, buying the surplus from the producer if it is an essential good for the welfare of the population. The supply may not be affected if this measure makes the distribution of the product profitable. The graph demonstrates the difference between supply and demand at the equilibrium price and the legally set minimum price.

One of the most prominent examples of the binding price floor is the amount of the established by law at the governmental level. Employers must pay the salaries to the workers not lower than the established minimum wage. In case of violation of this regulation, the company may be held legally liable. The binding price floor for agricultural supply is maintained in a special way in the United States. The state purchases crops, thus, artificially increasing the demand and maintaining the price at a certain level. These examples are clear indications that the government sets a binding price floor in order to protect a vulnerable segment of the market or any sensitive industry in the economy.

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