Price floor is legally mandated minimum price set on a particular good or service. Usually, it represents Government's attempt to regulate the market in order to support suppliers. Regarding this law, the price of product or service is not allowed to fall under a certain level and sellers can charge for it no less than fixed price (Heyne, Boettke, Prychitko, 2010). However, setting price floor above equilibrium price usually causes unintended consequences on the market showing itself in surpluses of controlled good or service due to planned consumption decrease and increase of planned output.
Impact of vodka's floor pricing on equilibrium price
In this research it is considered how setting (by Polish Government) a minimum price for vodka - price floor - would influence its equilibrium price on Polish market, and how it would impact both suppliers and consumers. Considering that setting a minimum price below market clearing price is ineffective, for the purpose of this research the price floor is set above equilibrium price.
It is assumed that Polish Government, guided by noble motives and because of high costs caused by alcoholism (e.g., treatment, healthcare, social), decided to prevent harmful effects of drinking alcohol by setting a minimum price of vodka. (By the way, by enforcing such law Government is forced to clearly describe the definition of vodka and to control its sales, what in turn leads to bureaucracy and increase of controlling costs). In this case, Government's intention is not to support alcohol suppliers but to reduce alcohol consumption. Thus, it is prohibited by law that sellers charge for a half liter of vodka less than $10, the same consumers are allowed to legally buy it only for more than this set price. It is also assumed that market clearing price for half liter of vodka is $5, the price at which plans of suppliers and consumers are fully coordinated in the market. This also means that at this price quantity demanded equals quantity supplied - there is no shortage nor surplus of vodka. Assuming additionally that other conditions on the alcohol market remain unchanged, setting a price floor for vodka will cause its surplus resulted from two directions - change of quantity demanded and supplied.
Because price of vodka increased (by Government's decision) above equilibrium price for this good, customers would verify their plans of buying it and reduce purchased quantity of vodka. According to demand law, quantity demanded would decrease due to higher price. At established higher price, less consumers could afford it. Moreover, those who would not be willing to reduce its consumption would search for vodka's substitutes. They would increase consumption of other alcoholic beverages (beer or wine), but many of them would buy or even produce it outside legal market. It could effect in increased sales of equipment for the production of homemade alcohol, and also could lead to illegal actions such as smuggling. Considering the costs which Government wanted to take care of by this decision,