Question

The diagram below shows one of the government intervention programmes in the market. 

1. Identify the programme and calculate the excess supply. 

2. Explain how the government is monitoring the higher price fixed.

Answer 1

1. Minimum price floor/price, 40 unit excess supply. 

2. The government announces the minimum price above the market price. As a result of this intervention there occurs excess supply in the market. The government has to remove the excess from the market to maintain the price. So the government store the excess supply in the warehouses and redistribute it at the time of shortage.