Question

What are the negative consequences of establishing a price floor on milk?

1) Decreased consumer demand for milk
2) Surplus of milk in the market
3) Increased government intervention in the milk industry
4) Higher prices for consumers

Answer 1

Establishing a price floor on milk creates a market surplus, leads to higher prices for consumers, and necessitates increased government intervention in the dairy industry.

Step-by-step explanation:

Establishing a price floor on milk can lead to several negative consequences in the market. A price floor is set above the market equilibrium, leading to a surplus of milk since the quantity supplied by producers exceeds the quantity demanded by consumers at the higher price. This surplus often results in wasted resources, as excess milk may spoil if it is not sold, and requires government intervention and expense to manage. Additionally, consumers face higher prices, which may reduce their demand for milk and milk products and could encourage consumers to seek substitutes or forego purchases, affecting the overall dairy consumption habits.