The correct option is 1 and 2 only.
Explanation
Government intervention in market mechanisms often takes the form of price controls. A Price Floor is a regulatory measure where the government sets a minimum legal price for a good or service, preventing the market price from falling below a certain level. To be effective, it must be set above the equilibrium price.
Statement-wise Analysis:
- Statement 1 is Correct: A price floor is defined as a government-imposed lower limit on the price of a specific good or service. It ensures that sellers receive a minimum remuneration for their product or service.
- Statement 2 is Correct: Minimum Wage Legislation is a classic example of a price floor in the labor market. The government sets a minimum wage rate (price of labor) that employers must pay, which is typically set above the equilibrium wage rate to ensure a basic standard of living for workers.
- Statement 3 is Incorrect: When a price floor is set above the equilibrium price, the quantity supplied by producers increases (due to the incentive of higher prices), while the quantity demanded by consumers decreases. This results in excess supply (a surplus) in the market, not excess demand. Excess demand is typically a consequence of a Price Ceiling (maximum price limit set below equilibrium).
Key Takeaway:
A Price Floor (e.g., MSP, Minimum Wage) creates a market surplus (excess supply), whereas a Price Ceiling (e.g., rent control) creates a market shortage (excess demand).