Meaning of Price Floor or Minimum Support Price(MSP) and Price Ceiling.

Meaning of Price Floor or Minimum Support Price(MSP) and Price Ceiling | Government Intervention in Price Fixing

Government Intervention in Price Fixing

As you know the Price of Goods or services are determined at  equilibrium where Demand and Supply are equal( known as price Equilibrium) in market (without government interference). In the real world. markets are hardly free from government interference. Sometimes, the government has to intervene in the process of price determination when the equilibrium price so determined is either very high for the consumers or very low (non-profitable) for the producers of the commodity.

The government interventions may be of two types Price ceiling and Price Floor (Minimum Support Price) - We shall discuss them in detail here after.

(1). Concept of Price Ceiling

(a) By price ceiling we mean fixing the maximum price of a commodity at level lower than the equilibrium price by the Government. It is done for controlling the prices of essential commodities when the equilibrium price determined by free play of demand supply forces is too high to afford for poor people.

Price ceiling usually is imposed on essential commodities below the equilibrium price or market determined price. The main reason for such decision is that the equilibrium price is very high for common people to afford.

(2) Concept of Price Floor or Minimum Support Price (MSP) 

(a) Meaning- The Government may intervene the process of price determination by means of price floor. "Price Floor means the minimum price above equilibrium price) fixed by the government, which the producers must be paid for their produce." It is also called minimum price ceiling.

(b) Need for Price Floor- The need for price floor arises when the government finds that equilibrium price is too less for the producers to meet the cost production, particularly in agricultural sector. The Government of India maintains a variety of price support programmes for a number of agricultural products such as wheat, sugarcane etc. The floor is usually set up at a level higher than the market determined price of these commodities.