▷ Minimum price fixing

The fixing of the minimum price, like the maximum price, They areeconomic policies of price regulation established by governments; but unlike, with the setting of minimum prices seeks to protect bidders.

This occurs when the market price for certain merchandise is unfavorable or unfair for the suppliers of those products or services.

However, like any interventionist economic policy, also generates a disturbance in the market equilibrium in the productive sector subject to regulation; therefore, they are price regulation measures that must be previously analyzed to avoid causing negative effects on the economy.

Basically, with the setting of minimum prices seeks to establish a protection mechanism for those vulnerable productive sectors, such as the agricultural sector or the labor market through the fixing of the minimum wage.

What is the minimum price?

The minimum price is rate or minimum value for which a good or service can be offered according to the regulations established by the state; in which, said minimum regulated price is higher than the equilibrium price in the market, for this purpose generates an artificial rise in prices.

These measures established by the state seek to set a reasonable price that allows bidders to obtain a fair price for their products or services, thus curbing excessive price declines for those markets.

These disproportionate price drops occur when the quantity of goods and services supplied exceeds the demand; that is, it is produced at a faster rate than the proportion in which they are consumed.

Why are minimum prices regulated?

As with the regulation of maximum prices, the fixing of minimum prices also depends on the market situation, when imperfect competition occurs, caused failures in the market.

However, in perfect competition it is not feasible to set prices, since in a In a free market economy, prices regulate themselves through the behavior of supply and demand. demand.

But, the problem arises when there is imperfect competition in the market, the price being influenced by one of the economic agents involved in said market; In these cases, the power of influence in lowering prices is exercised by the plaintiffs., as occurs in the oligopsony market.

That is, in these markets the number of applicants is limited, as in some agricultural markets, where the number of food distributors is smaller than the number of producers agricultural; being the price influenced in favor of the distributors who buy from the producers.

In these situations, setting a minimum price is set asa justified and necessary measure to protect productive sectors vulnerable and thus avoid their possible collapse.

Negative Effects of Minimum Pricing

The setting of the minimum price implies a change in the market equilibrium price, due to the rise in prices due to state intervention policies; which leads to a series of negative effects that occur simultaneously with the regulation measure.

The first negative effect is the reduction in demand, since, by raising the minimum price, consumers will demand fewer quantities, which implies a decrease in their sales margin for sellers, affecting their level of profitability; for this reason many bidders are tempted to sell on the black market, at a lower price than legal.

Next, inefficiency is generated in the allocation of resources, because unnecessary resources, such as capital and land, are used to produce and supply more than what consumers need; resources that could be used for other purposes, such as meeting other consumer needs, thereby affecting efficiency in the economy.

In addition, this artificial increase through the fixing of the minimum price tends to have a negative impact on the quality of life of low-income consumers, since it implies that they will have to pay more for products or services that were cheaper before the regulation.

In the case of minimum price setting for the labor market, Through the minimum wage increase, generate as negative effect an increase in unemployment rates; as the demand for labor is reduced.

Although, the minimum wage increase represents an increase in workers' income; also generates parallel a increase in the prices of goods and services, which can encourage the inflationary phenomenon.

Minimum pricing examples

• The most classic example of setting a minimum price by the state in any country is the establishment of the minimum wage, which seeks to protect workers (job supply), establishing a value of work that allows them to cover their basic needs and have a good quality of life.
• The National Assembly of Ecuador, for example, proposed to establish a minimal price from $0.42 per liter of milk in February 2022, as a measure to protect the dairy industry against low prices that affect both the profitability of agricultural producers.
• With the conflict between Russia and Ukraine, agricultural producers around the world cannot export their merchandise to these countries; situation that generates a production surplus and with it a decrease in prices. To this end, countries like Ecuador, through the Minimum Support Prices (PMS), together with the Ministry of Agriculture, Livestock and Fisheries in (MAGAP), establish minimum prices for products such as bananas, as a measure to protect the industry and prevent said products from leaving the country at a price lower than the one set.

Practical example of minimum pricing

It is worth mentioning that the minimum price to be effective it must be set above the equilibrium price in the market, otherwise it will have no effect, since market forces are not constrained.

Thus, a fixed price floor above the market price has the power to prevent free market behavior from regulating supply and demand, This effect of the minimum price is observed in the following graph: