What are the disadvantages of floor price?

Answer 1

There are different advantages and disadvantages depending on whether you are talking about suppliers, consumers or the governing body.

For the government, the floor price is useful as they can use it to deter people from buying certain goods such as alcohol and tobacco. They can intervene on the market and set a minimum price at which the good must be sold at or above. If they do this then suppliers are forced to increase prices and therefore quantity demanded decreases. (the floor price must be set above the market equilibrium to be effective)

Disadvantages: sometimes an illegal market can develop where the good is sold at the original market price. For example, in the UK it is not uncommon to find small dealers that illegally import large stocks of cigarettes and then sell them for about half the price of cigarettes that can be bought in shops.

Can often make a political party unpopular with large powerful firms and this can affect their future political success (especially in america)

For suppliers, there are not many advantages. They are no longer able to set the price and depending on the elasticity of the good, their revenue will commonly decrease. Also, at this higher price, their will often be a surplus of supply.

For consumers of the good it is all bad. There are no real advantages, however, if for example a floor price is imposed on Cigarettes, then less people will be smoking. Fewer third parties will be affected negatively by second hand smoke and therefore negative externalities will decrease.