Question:
Demonstrating their generosity at a time of national distress, vegetable farmers in a country decide to sell as much vegetables as consumers want to buy, at half the competitive market equilibrium price. As a result of this action
(1) economic surplus will fall.
(2) economic surplus will increase.
(3) economic surplus will not change.
(4) consumer surplus will fall.
(5) producer surplus will increase.
Correct Answer:
(1)
Answer Explanation:
At half the equilibrium price, the quantity demanded expands significantly. If farmers choose to supply this entire inflated amount, they will be producing units where the Marginal Cost of growing them is much higher than the Marginal Benefit to consumers. This overproduction beyond the allocatively efficient point creates a deadweight loss, causing total economic surplus to fall.
Topic: Welfare Economics Year: 2020
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