A price floor is a policy tool that sets a legal minimum price for a good or service. It is often implemented to protect producers from falling prices and ensure a fair income, particularly in the agricultural sector. However, when the price floor is established above the equilibrium price, it can disrupt the natural market balance. This can lead to unintended consequences such as lost consumer surplus and reduced market efficiency.

When a price floor is imposed above the market-clearing price, producers who can still sell their goods can benefit by receiving higher prices. For instance, when wheat prices decline, the government's intervention ensures farmers obtain better compensation. This encourages farmers to increase production, knowing they will receive a guaranteed higher price. However, at this elevated price, consumers purchase less wheat, as their willingness to buy decreases with the higher cost. This imbalance results in an oversupply, leaving farmers with an unsold surplus of wheat.

The increase in wheat prices reduces consumer surplus, as buyers must pay more for the same quantity, or cut back on their purchases. At the same time, the unsold surplus represents wasted resources used to produce goods that were not sold and consumed. The combination leads to an economic inefficiency known as deadweight loss. These missed trades, when compared to the unregulated market price, highlight the inefficient allocation of resources, as some wheat that could have been sold at the equilibrium price remains unsold due to the higher price floor.

While price floors help protect producers by increasing their income and surplus, they also generate inefficiencies. Thus, although the policy achieves its goal of supporting farmers, it comes at the expense of market efficiency, illustrating the trade-offs involved in price interventions.