6/15/2004

Price Floor

According to our textbook, a price floor is a government-imposed limit on how low a price can be charged. I found an article on the agriculture law website that illustrates this concept. The article is titled “Dairy Income to Suffer, Says Federation.”

The effects of the USDA decreasing the level of the dairy price support program are large for farmers. Interestingly, the effects of lowering the levels of the program go far beyond just milk (i.e. how/where to store excess butter). According to the article, the USDA decision will also cause additional sales of surplus cheese to the government; consequently, the different class levels (milk, cheese, butter, etc.) will be affected as well.

With this price floor, just like the minimum wage example in the book, some people are being helped by this new policy and some people are being hurt by it. However, the question then must be asked…is it worth it? Are we sacrificing the inferior for the superior? Or is the government doing more harm then good?

6 comments:

Kid said...

Price floors to me seems unfair, in concept, to the consumers who buy the products that have the price floor. We are being punished for buying things, which usually are a necessity for us, like milk, and gas. All to help someone else, the producer, make a better price off the product and causing a surplus on it. Why does the Government need to create surplus on a product everyone already buys. When all they are going to do with the surplus is give it away to another country and in reality the item can be used right here in the United States. It just doesn't make much sense to me.

Dr. Tufte said...

One of the things that makes economics hard is that economists are very diligent about looking for repercussions of policy that are not obvious at first glance.

That is illustrated in this post where it notes that price floors for raw milk affect the markets for all the things that are made out of milk as well.

As to the last paragraph of the post, and the comment as well, price floors (or ceilings for that matter) do benefit some people at the expense of others. It's always hard to judge on net whether those benefits exceed the costs for the country as a whole. But ... keep in mind what I said about public choice. These measures are politically feasible if they extend large benefits to a small group (who will vocally support the measure) while spreading the costs widely (so that people who are hurt are not hurt enough to bother being vocal).

micahnay said...

I totally agree with Lizzie. I believe that the government shouldn't put a price floor on most products, especially ones that consumers are willing to walk to the farthest corner of the store to get like milk. Grocery stores put milk in the back because everyone drinks it and everyone needs it to cook with so that while they are walking to the milk, they may buy more "stuff" than they went there to get in the first place. Milk, eggs, and cheese are basically necessities. With that in mind, what is the government doing controlling something that the invisible hand can do? I think that there are some things that do need price floors. If there wasn't a price floor on corn and other vegetables, farmers wouldn't produce it because it wouldn't be worth their while. Then we wouldn't have it. In conclusion, price floors have a good role in our economy, but when reckless politicians place a price floor on a product, just to make one group of people happy, it is just wrong unless it is in the best interest of the country as a whole.

Dr. Tufte said...

I really like the part about putting necessities in the back of the store. Its one more way managers control the set of choices you can select from.

I don't think we would have no corn without price floors. I think that if we removed the floor, farmers would go out of busines one by one, but before we got to zero the price of corn would rise enough to keep some of them still in business.

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