What is meant by a “binding price floor”? Give an example and explain how a binding price floor affects the market equilibrium.

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When the government chooses to intervene in the pricing of a good, they can choose to either impact the floor or the ceiling of the price. As you would expect, the ceiling refers to the upper end of the pricing, whereas the floor refers to the bottom end of the pricing. Therefore, when there is a binding price floor, this means that the government sets a price floor. As a result, the business would be unable to sell a product for less than this price floor.

A binding price floor can impact the market equilibrium in a couple of ways. If the products are unable to be sold at this higher price, then there will be an excessive amount of quantity supplied with not enough quantity demanded. Because the binding price floor raises prices, then consumers will always be negatively impacted by a binding price floor because they will be forced to pay more per unit of this good. However, if businesses are still able to sell at this price, then they will benefit from a binding price floor as they will be making more profit per unit sold, which can help them to recoup for less quantities that may be sold.

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