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CA Foundation · Business Economics · Indian Economy

A farmer producing wheat finds that the government's Minimum Support Price is set above the free-market equilibrium price, and the government buys all the surplus offered at MSP. Which of the following is the most likely consequence?

Government stocks of wheat build up and the fiscal burden of procurement and storage increases. An MSP above equilibrium makes supply exceed market demand, and the government absorbs the surplus. Higher prices do not raise demand, and a guaranteed price encourages production rather than cutting it.

  1. AWheat stocks with the government build up and the fiscal burden of procurement and storage risesCorrect
  2. BMarket demand for wheat rises because the price is higher
  3. CFarmers reduce wheat output because the price is guaranteed
  4. DThe government earns a surplus because it buys at the equilibrium price

Explanation

With MSP above equilibrium, quantity supplied exceeds quantity demanded in the market. Since the government buys the excess, its stocks accumulate and procurement, storage and carrying costs rise, hurting the fiscal position. Demand does not rise at a higher price, and a guaranteed higher price tends to encourage, not reduce, output.

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