The persistent surplus that results from a price floor creates missed opportunities—inefficiencies—that resemble those created by the shortage that results from a price ceiling. Like a price ceiling, a price floor creates inefficiency in at least four ways:

In addition to inefficiency, like a price ceiling, a price floor leads to illegal behavior as people break the law to sell below the legal price.

Inefficiently Low Quantity Because a price floor raises the price of a good to consumers, it reduces the quantity of that good demanded; because sellers can’t sell more units of a good than buyers are willing to buy, a price floor reduces the quantity of a good bought and sold below the market equilibrium quantity. Notice that this is the same effect as a price ceiling. You might be tempted to think that a price floor and a price ceiling have opposite effects, but both have the effect of reducing the quantity of a good bought and sold (as you can see in the accompanying Pitfalls).

As in the case of a price ceiling, the low quantity sold is an inefficiency due to missed opportunities: price floors prevent mutually beneficial transactions from occurring, transactions that would benefit both buyers and sellers. Figure 4-6 shows the inefficiently low quantity of butter sold with a price floor on the price of butter.

Inefficient Allocation of Sales Among Sellers Like a price ceiling, a price floor can lead to inefficient allocation—in this case, an inefficient allocation of sales among sellers: sellers who are willing to sell at the lowest price are unable to make sales, while sales go to sellers who are only willing to sell at a higher price.

One illustration of the inefficient allocation of selling opportunities caused by a price floor is the problem of unemployment and the black market for labor among the young in many European countries—notably France, Spain, Italy, and Greece. In these countries, a high minimum wage has led to a two-tier labor system, composed of the fortunate who have good jobs in the formal labor market that pay at least the minimum wage, and the rest who are locked out without any prospect of ever finding a good job. Either unemployed or underemployed in dead-end jobs in the black market for labor, the unlucky ones are disproportionately young, from the ages of 18 to early 30s.

Although eager for good jobs in the formal sector and willing to accept less than the minimum wage—that is, willing to sell their labor for a lower price—it is illegal for employers to pay them less than the minimum wage. The inefficiency of unemployment and underemployment is compounded as a generation of young people is unable to get adequate job training, develop careers, and save for their future. These young people are also more likely to engage in crime. And many of these countries have seen their best and brightest young people emigrate, leading to a permanent reduction in the future performance of their economies.

Wasted Resources Also like a price ceiling, a price floor generates inefficiency by wasting resources. The most graphic examples involve government purchases of the unwanted surpluses of agricultural products caused by price floors. The surplus production is sometimes destroyed, which is pure waste; in other cases, the stored produce goes, as officials euphemistically put it, “out of condition” and must be thrown away.

Price floors also lead to wasted time and effort. Consider the minimum wage. Would-be workers who spend many hours searching for jobs, or waiting in line in the hope of getting jobs, play the same role in the case of price floors as hapless families searching for apartments in the case of price ceilings.

Inefficiently High Quality Again like price ceilings, price floors lead to inefficiency in the quality of goods produced.

We saw that when there is a price ceiling, suppliers produce products that are of inefficiently low quality: buyers prefer higher-quality products and are willing to pay for them, but sellers refuse to improve the quality of their products because the price ceiling prevents their being compensated for doing so. This same logic applies to price floors, but in reverse: suppliers offer goods of inefficiently high quality.

How can this be? Isn’t high quality a good thing? Yes, but only if it is worth the cost. Suppose that suppliers spend a lot to make goods of very high quality but that this quality isn’t worth much to consumers, who would rather receive the money spent on that quality in the form of a lower price. This represents a missed opportunity: suppliers and buyers could make a mutually beneficial deal in which buyers got goods of lower quality for a much lower price.

A good example of the inefficiency of excessive quality comes from the days when transatlantic airfares were set artificially high by international treaty. Forbidden to compete for customers by offering lower ticket prices, airlines instead offered expensive services, like lavish in-flight meals that went largely uneaten. At one point the regulators tried to restrict this practice by defining maximum service standards—for example, that snack service should consist of no more than a sandwich. One airline then introduced what it called a “Scandinavian Sandwich,” a towering affair that forced the convening of another conference to define sandwich. All of this was wasteful, especially considering that what passengers really wanted was less food and lower airfares.

Since the deregulation of U.S. airlines in the 1970s, American passengers have experienced a large decrease in ticket prices accompanied by a decrease in the quality of in-flight service—smaller seats, lower-quality food, and so on. Everyone complains about the service—but thanks to lower fares, the number of people flying on U.S. carriers has grown from 130 billion passenger miles when deregulation began to approximately 900 billion in 2014.

Illegal Activity In addition to the four inefficiencies we analyzed, like price ceilings, price floors provide incentives for illegal activity. For example, in countries where the minimum wage is far above the equilibrium wage rate, workers desperate for jobs sometimes agree to work off the books for employers who conceal their employment from the government—or bribe the government inspectors. This practice, known in Europe as “black labor,” is especially common in Southern European countries such as Italy and Spain.