Final answer:
When price floors are not binding, they do not impact the quantity traded, but they can still send a price signal and redistribute surplus. For example, a minimum wage floor below the prevailing wage rate will not affect employment levels, but it can raise wages for some workers.
Step-by-step explanation:
When price floors are not binding, it means that the market price is already above the floor, and the floor has no effect on the quantity traded. In this case, the price floor acts as a nonbinding constraint on the market outcome. For example, if the minimum wage is set below the prevailing wage rate, it will not impact employment levels because employers are already willing to pay wages above the floor.
The presence of nonbinding price floors can still have some effects on the market. One consequence is the creation of a price signal. When the government sets a price floor, it sends a message to market participants about the minimum price that is considered acceptable. This can impact behavior and expectations in the market.
Another consequence of nonbinding price floors is the redistribution of surplus. In the case of minimum wage, if the floor is set below the equilibrium wage, some workers may receive higher wages as a result. However, because the floor is not affecting the market outcome, there is no change in the quantity of employment.