Price Floors & Price Ceilings

Price Floors & Price Ceilings

Floors are High !

Say it again, Floors are High !

One more time, Floors are High !

A price floor is the lowest price that a supplier can charge for its good.

The price floor above is at $5, which mean that the $5 is the minimum price that the supplier can charge for its good. Governments often interfere in the market by passing laws that require producers (suppliers) to charge minimum prices. This price protects the suppliers in that no business can now charge less than the minimum price.

If a business decides to sell its good for less than the $5, the business owner might be fined or sent to jail.

Jacob Meged was a tailor of Polish descent who had a tailor shop at 138 Griffiths Street in Jersey City. He had a wife and four children and he needed money to feed his family.  Other tailors were charging 40 cents, but he wanted to get more business, so he put a sign in his shop window advertising that he would press suits for 35 cents. After all, this was America where you were accustomed to being free to charge what you want.  Beating the competition and being entrepreneurial was the American way, and he would be happy to press suits for 35 cents.  Unfortunately, Jacob didn’t get more business and instead, he was arrested.J. Raymon Tiffany, Special Assistant Attorney General in charge of enforcing NRA codes in New Jersey took responsibility for prosecuting the tailor. When Jacob Meged was read the charges, he told Judge Kinkead that he was only vaguely aware of the existence of a code, but he pled guilty to the charge that he had violated the New Jersey State Recovery Act.  Mr. Tiffany asked the court to impose a sentence stiff enough to warn other code violators that the law had teeth in it.

On Friday, April 20, 1934, Judge Robert V. Kinkead sentenced Jacob Meged to 30 days in the county jail, and he was ordered to pay a $100 fine.   At 40 cents a suit, Meged would have to press 250 suits to cover his fine.  That would be $100 he couldn’t use to feed his family, and in addition to this, he would lose a month’s earnings.

As The New York Times put it, “He believed that the codes were designed to help the ‘little fellow’ and could not believe that by charging 35 cents instead of 40 cents to press a suit would put him behind bars. In court yesterday he stood as if in a trance when sentence was pronounced.  He hoped that it was a joke.”

A price floor below the equilibrium point (market clearing price) is NOT  an effective or binding price floor.

Understand:

If the minimum price (price floor) is set below the equilibrium market clearing point it will have no effect as the market has already cleared.

Jung Sub: I don't get it.

Mr. Waugh: Picture this,, at the $3 price Jung Sub buys all the jars of pinto beans that I'm selling.

I'm happy and Jung Sub is happy. The market has cleared.

Then a government employee walks in the room and says that we can't sell beans for less than $1 per jar. The $1 minimum required price had no effect on the market (IT WASN'T EFFECTIVE), IT MADE NO DIFFERENCE.