What is a price floor?

A price floor is defined as the lowest legal price at which a commodity can be sold. It is established by the government to ensure that prices do not fall below a certain level, which is especially important in markets where producers might otherwise struggle to cover their production costs. By setting a price floor, the government aims to protect the income of producers and maintain their livelihood, thereby preventing adverse effects on the market, such as a significant drop in supply.

For example, common examples of price floors include minimum wage laws in the labor market and minimum price regulations on agricultural products. These mechanisms are intended to support the financial viability of certain sectors, ensuring that sellers can sustain their operations.

In contrast, options that suggest the highest legal price for a commodity or a government-mandated maximum price do not accurately describe a price floor, as these definitions relate to price ceilings, which are designed to keep prices from exceeding a certain threshold. Additionally, suggesting that price floors are financial aids provided by the government misrepresents the concept; price floors are a regulation on selling prices rather than a direct financial subsidy.