The Effects of "Non-binding" Price Floors

Hard price floors are a standard form of agricultural price support while soft floors (auction reserve prices) are often included in cap-and-trade programs. A hard floor is a government commitment to purchase at the floor price, in unlimited amounts, whatever commodity is offered for sale, whereas a soft floor can be regarded as a commitment to buy at that price up to the limited amount of commodity the government auctions each period. We investigate theoretically the effect of each type of floor in the stochastic, competitive storage model adopted independently by agricultural and environmental economists. We find that, even if the floor is inserted below the initial spot price, that price will, under specified conditions, jump up-a phenomenon that we call "action at a distance."

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William M. Shobe