Question

Explain the implication of the policy of fixation of floor price.

Answer 1

When the government sets a floor price above the equilibrium price, it causes surplus supply because producers are willing to supply more than consumers are willing to buy at that price. This creates a market surplus, which may result in unsold inventory. To help producers, particularly farmers, the government frequently intervenes by getting surpluses through entities such as the Food Corporation of India. While this helps to provide a minimal income for producers, it also increases the government’s financial burden in terms of procurement, storage, and distribution costs. Also, lesser market demand at higher prices may result in fewer overall market transactions. As a result, while the floor pricing policy benefits producers, it must be properly controlled to avoid inefficiencies and waste.