Non Binding Price Floor
Other price floors include regulated us airfares prior to 1978 and minimum price per drink laws for alcohol.
Non binding price floor. Price floors set below the market price have no effect. The price floor is no binding ie it doe snot distort the market outcome if it is. A non binding price floor is one that is lower than the equilibrium market price. However if you hit the equilibrium price first the price floor is not binding is not.
Consider the figure below. This video explains and shows how a non binding price floor becomes ineffective. Note that the price floor is below the equilibrium price so that anything price above the floor is feasible. This is an example of a non binding or not effective price ceiling.
If you hit the price ceiling. If the price floor is set below the market price the price at which the good is actually sold not what the price would be in perfect competition it has no effect on the market price or quantity traded. While price floors are often imposed by governments there are also price floors which are implemented by non governmental organizations such as companies such as the practice of resale price maintenance. A price floor is the minimin level of price per unit that should be charged.
A price ceiling that doesnt have an effect on the market price is referred to as a non binding price ceiling. In general a price ceiling will be non binding whenever the level of the price ceiling is greater than or equal to the equilibrium price that would prevail in an unregulated market. An example of a non binding price ceiling in the supply and demand diagram looks as follows. Another way to think about this is to start at a price of 0 and go up until you the price ceiling price or the equilibrium price.
If you hit the price floor first it is binding. Price floor and price ceiling. Another way to think about this is to start at a price of 100 and go down until you the price floor price or the equilibrium price. The government setting a maximum price should not affect their pricing decisions as if they were able to charge a price of 130 they would already do it as it would earn them more profit.
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