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IAI Actuarial Core Principles · Business Economics · Government intervention in a market

A government introduces a minimum support price for a crop above the market-clearing level and buys all unsold output. Which statement best describes a consequence for public finances and the market?

The government bears the fiscal cost of buying the surplus and of storing or disposing of it. A support price above equilibrium raises supply and cuts demand, creating excess output. Consumers face higher prices, and producers are encouraged to produce more, not less.

  1. AThe government bears the cost of purchasing the surplus, and storage or disposal costs ariseCorrect
  2. BConsumers benefit from lower prices as supply expands
  3. CThe surplus disappears because the floor raises demand
  4. DProducer incentives to expand output fall
  5. The floor has no fiscal effect because trades occur at market price

Explanation

A binding floor raises quantity supplied and lowers quantity demanded, creating a surplus. If the government buys it, it spends public funds and incurs storage or disposal costs. Consumers pay the higher price, and producers are encouraged to expand output, not reduce it.

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