When is a price floor binding?
Understand the Problem
The question is asking about the conditions under which a price floor is considered binding. A binding price floor occurs when it is set above the equilibrium price, meaning that it prevents the market from reaching its natural equilibrium price, leading to a surplus of goods. This indicates that the price floor has a significant impact on the market.
Answer
A price floor is binding when it is set above the equilibrium price.
A price floor is binding when it is set above the equilibrium price.
Answer for screen readers
A price floor is binding when it is set above the equilibrium price.
More Information
A binding price floor is created to ensure prices do not drop below a certain level, often intending to protect producers, but it can cause surpluses as the minimum price is higher than what consumers are willing to pay.
Tips
A common mistake is to think that any imposed price floor is binding; it must be set above the equilibrium price to effectively raise the market price.
Sources
- Binding Price Floor - Economics Online - economicsonline.co.uk
- Price Floor - Definition, Types, Effect on Producers and Consumers - corporatefinanceinstitute.com
- Price Controls - Ceilings and Floors - EconPort - econport.org
