Price floor

An example of a price floor is minimum wage laws, where the government sets out the minimum hourly rate that can be paid for labour. In this case, the wage is the price of labour, and employees are the suppliers of labor and the company is the consumer of employees' labour. When the minimum wage is set above the equilibrium market price for unskilled or low-skilled labour, employers hire fewer workers. Employers may cut their use of labour by switching to a "self-serve" model in which customers do an action previously done by staff (e.g., self-serve gas stations); or buying machines, computers or robots to do part or all of employees' jobs (e.g., automated teller machines in banks, automated ticket kiosks in parking garages).

Consequentially, unemployment is created (more people are looking for jobs than there are jobs available). At the same time, a minimum wage above the equilibrium wage would allow (or entice) more people to enter the labor market because of the higher salary. The result is a surplus in the amount of labor available. The equilibrium wage for workers would be dependent upon their skill sets along with market conditions.[2]

Previously, price floors in agriculture have been common in Europe. Since the 1999s, the EU has used a "softer" method: if the price falls below an intervention price, the EU buys enough of the product that the decrease in supply raises the price to the intervention price level. As a result of this, "butter mountains" of surplus products in EU warehouses have sometimes resulted.[3]^:40–43

In Canada, supply management is a national agricultural policy framework used in Canada that coordinates supply and demand of dairy, poultry and eggs through production and import control and pricing mechanisms designed to prevent shortages and surpluses, to ensure farmers a fair rate of return and Canadian consumer access to a high-quality, stable, and secure supply of these sensitive products. With supply management, the Canadian "government sets a minimum price that processors have to pay the farmers, or a 'price floor.' Critics have argued that floor is artificially high, meaning dairy and other products cost more for Canadian consumers that they might otherwise."[4]

Supply management's supporters say that the system offers stability for producers, processors, service providers and retailers.[5] Detractors have criticized tariff-rate import quotas, price-control and supply-control mechanisms used by provincial and national governing agencies, organizations and committees. The policy has been described as regressive and protectionist and costly with money transferred from consumers to producers through higher prices on milk, poultry and eggs which some label as a subsidy. Canada's trade partners posit that SM limits market access.[6][7]

Canada's supply management system, which encompasses "five types of products: dairy, chicken and turkey products, table eggs, and broiler hatching eggs", "coordinates production and demand while controlling imports as a means of setting stable prices for both farmers and consumers."[8] The Fraser Institute, C.D. Howe, Atlantic Institute for Market Studies (AIMS), the Montreal Economic Institute (MEI), Frontier Centre for Public Policy, and the School of Public Policy, University of Calgary are pro-economic freedom, neo-liberal think tanks which have called for eliminating supply management because they say it is market distorting.

Minimum support price (India) is a government intervention policy program. The farmers are paid prices above market determined rates to help them. Support prices helped India gain food security during period of Green Revolution in India[9]

In Scotland, the government passed a law that sets out a price floor on alcoholic beverages. The Alcohol (Minimum Pricing) (Scotland) Act 2012 is an Act of the Scottish Parliament, which introduces a statutory minimum price for alcohol, initially 50p per unit, as an element in the programme to counter alcohol problems. The government introduced the Act to discourage excessive drinking. As a price floor, the Act is expected to increase the cost of the lowest-cost alcoholic beverages, such as bargain-priced cider. The Act was passed with the support of the Scottish National Party, the Conservatives, the Liberal Democrats and the Greens. The opposition, Scottish Labour, refused to support the legislation because the Act failed to claw back an estimated £125m windfall profit from alcohol retailers.[10]

A review in October 2017 by former chief justice Trevor Riley brought about huge changes to policy in the Northern Territory, Australia, where alcohol-fuelled crime has long been a problem. The 220 recommendations included a floor price for all alcohol products at A$1.50 per standard drink.[11] In the 10 months between 1 October 2018, the date that the floor price and other measures were imposed by the NT government, and 31 July 2019, there was a 26% decrease in alcohol-related assaults in the Territory. [12]

Carbon pricing is being implemented by governments to reduce the use of carbon fuels. Carbon pricing can be determined by specific policies such as taxes or caps or by commitments such as emission reduction commitments or price commitments. However, emission reduction commitments (used by the Kyoto Protocol) can be met by non-price policies, so they do not necessarily determine a carbon price. Carbon policies can be either price-based (taxes) or quantity-based (cap-and-trade). A cap-and-trade system is quantity-based because the regulator sets an emissions quantity cap and the market determines the carbon price.

The IMF’s Fact Sheet states that “Cap-and-trade systems are another option, but generally they should be designed to look like taxes through revenue-raising and price stability provisions."[13] Such designs are often referred to as hybrid designs. The stability provisions referred to are typically floor and ceiling prices[14] (a ceiling price is also known as a safety valve), which are implemented as follows. When permits are auctioned, there is a floor (reserve) price below which permits are not sold, and permits for immediate use are always made available at the ceiling price, even if sales have already reached the permit cap. To the extent the price is controlled by these limits, it is a tax. So if the floor is set equal to the ceiling, cap-and-trade becomes a pure carbon tax.

A Boeing 707 at JFK airport in 1970. During the mid-1960s, airfares had a regulated price floor that made flying twice the cost of the 2010s, due to the ending of price controls in 1978.

Until the late 1970s, government regulated price floors on airfares in the US made flying "absurdly expensive" to the point that in 1965, more than 80% of Americans had never flown on a jet.[15] For example, in 1974, US air carriers had to charge at least $1,442 (in inflation-adjusted dollars) for a New York City to Los Angeles trip, a flight that cost as little as $278 in 2013.[16] In 1978, the US government deregulated airfares, on the grounds that flying is not a necessity (like food or prescription drugs), and nor was it addictive (like alcohol). The government deregulated airfares so that increased competition would lead to a drop in airfare prices. By 2011, the inflation-adjusted cost of air travel dropped by half as compared with 1978. By 2000, half of Americans were taking at least one round-trip air flight per year.[17]