What usually results when a government fixes a good's price above its equilibrium price?

What usually results when a government fixes a good's price above its equilibrium price?

• A. Surplus
• B. Shortage
• C. Equilibrium
• D. Scarcity

Answer: (A)

Setting a price above the market-clearing level creates a surplus, or excess supply. When the price is higher, producers want to supply more because profits look bigger, but buyers want to purchase less because it’s more expensive. The result is that the quantity supplied exceeds the quantity demanded, leaving extra goods unsold. In response, the government or the market may have to absorb or dispose of the surplus, such as buying the excess or producers reducing output. A shortage would occur if the price were kept below the equilibrium price, not above. Equilibrium is the balance point where supply equals demand, which isn’t the outcome of a price floor. Scarcity refers to the fundamental limited nature of resources, not the specific effect of setting a price above equilibrium.

Setting a price above the market-clearing level creates a surplus, or excess supply. When the price is higher, producers want to supply more because profits look bigger, but buyers want to purchase less because it’s more expensive. The result is that the quantity supplied exceeds the quantity demanded, leaving extra goods unsold. In response, the government or the market may have to absorb or dispose of the surplus, such as buying the excess or producers reducing output. A shortage would occur if the price were kept below the equilibrium price, not above. Equilibrium is the balance point where supply equals demand, which isn’t the outcome of a price floor. Scarcity refers to the fundamental limited nature of resources, not the specific effect of setting a price above equilibrium.