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The effects of “nonbinding” price floors

Author

Listed:
  • Salant, Stephen
  • Shobe, William
  • Uler, Neslihan
Abstract
Governments often impose price floors to protect sellers against low prices in markets characterized by uncertainty. Hard floors arise in grain and currency markets whenever the government acquisitions at the support price are unconstrained. Soft floors arise whenever such acquisitions are subject to a binding constraint. An important special case of a soft floor arises in cap-and-trade programs when the permit auction has a reserve price. Such an auction is equivalent to one with no reserve price combined with a government program to acquire at the reserve price up to the amount auctioned. Using a unified approach, we investigate a novel characteristic of such floors. Although seemingly “nonbinding,” such floors can influence the new equilibrium price. Whether inserted below or above the laissez-faire price, they can result in a new price strictly exceeding the floor—a phenomenon we dub “action at a distance.” We explain it theoretically and illustrate with simulations.

Suggested Citation

  • Salant, Stephen & Shobe, William & Uler, Neslihan, 2022. "The effects of “nonbinding” price floors," European Economic Review, Elsevier, vol. 145(C).
    • Handle: RePEc:eee:eecrev:v:145:y:2022:i:c:s0014292122000605
    DOI: 10.1016/j.euroecorev.2022.104122
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    Cited by:

    1. Salant, Stephen & Shobe, William & Uler, Neslihan, 2023. "The effects of seemingly nonbinding price floors: An experimental analysis," European Economic Review, Elsevier, vol. 159(C).
    2. Woerman, Matt, 2023. "Linking carbon markets with different initial conditions," Journal of Environmental Economics and Management, Elsevier, vol. 119(C).
    3. Timothy N. Cason & John K. Stranlund & Frans P. de Vries, 2022. "Investment Incentives in Tradable Emissions Markets with Price Floors Approach," Purdue University Economics Working Papers 1331, Purdue University, Department of Economics.

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    More about this item

    Keywords

    Price floors; Emissions permits; Agricultural price supports; Commodity markets;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D0 - Microeconomics - - General
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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