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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

A government introduces a minimum price for a good above the free-market equilibrium price and buys any unsold surplus to keep the price at that level. Which statement about this policy is correct?

It leads to excess supply, and the government bears the cost of buying the surplus. A minimum price above equilibrium encourages producers to supply more while consumers buy less. The gap between the two is unsold output, which the government must purchase to hold the price, using public funds.

  1. AIt leads to excess demand, which the government must meet from stocks
  2. BIt leads to excess supply, and the government bears the cost of buying the surplusCorrect
  3. CIt lowers the price paid by consumers below equilibrium
  4. DIt has no effect on the quantity produced because price is fixed

Explanation

A minimum price above equilibrium raises quantity supplied and lowers quantity demanded, creating excess supply. To maintain the price, the government must purchase the surplus, which costs public money. Option A describes the effect of a maximum price.

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