Final Answer:
Binding price floors are government-imposed minimum prices that are set above the market equilibrium, leading to surplus. Non-binding price floors are set below the equilibrium, having no impact on the market price.
Step-by-step explanation:
Binding price floors are established when the government sets a minimum price for a good or service that is above the equilibrium price determined by market forces. In such cases, the government aims to ensure that the market price does not fall below a certain level, typically to protect the incomes of producers. The consequence of a binding price floor is a surplus, as the quantity supplied exceeds the quantity demanded at the higher price. Mathematically, if P_floor is the price floor and Qd is the quantity demanded while Qs is the quantity supplied, a binding price floor occurs when Qs > Qd. This surplus represents the difference between the quantity supplied and the quantity demanded at the price floor.
Non-binding price floors, on the other hand, are ineffective as they are set below the equilibrium price. In this situation, the market forces of supply and demand determine the price, rendering the price floor irrelevant. The market price naturally settles at the equilibrium level, and there is neither a surplus nor a shortage. Mathematically, a non-binding price floor occurs when Qs < Qd. In this case, the market-clearing price is determined by the intersection of the supply and demand curves, and the price floor becomes a non-binding constraint on the market.
In summary, the key distinction lies in whether the government-set price floor is above (binding) or below (non-binding) the equilibrium price. Binding price floors result in surpluses, while non-binding price floors have no impact on the market outcome.