Question

Well-meaning individuals sometimes argue that the government should use price floors to ensure high prices for the producers of some goods and services (e.g., airline travel, trucking, milk, and low skilled labor). At this point, you should be able to explain in some detail why economists believe that this policy usually is a bad idea. Briefly do so.

Answer 1

When the government use price floors to ensure high prices for the producers of some goods and services (e.g., airline travel, trucking, milk, and low skilled labor), the price of such goods and services are set above the equilibrium price level. When prices are set above the equilibrium level, it creates market inefficiency. At a price above the equilibrium market price, the quantity demanded of the product falls wheras quantity supplied will increase leading to excess supply and surplus in the economy. This will further worsen the situation of producers as they don't have sufficient demand for their products at higher prices. Hence price floors are not a good policy always. Price floors should be only adopted if the market price of the product is very low and producers are not able to cover their costs.