Assume a market price is set artificially high. In other words, the price is set above the equilibrium price. How will this affect the market?
A) Every consumer loses surplus, and it all gets transferred to producers.
B) Every producer gains surplus, due to the higher price now being charged.
C) Some consumers drop out of the market, and those left lose some surplus.
D) None of these are correct.

Question

Quizplus · Accepted Answer

When the market price is set above the equilibrium price, it creates a surplus of the product, which can cause some consumers to drop out of the market. This is because the higher price may make the product unaffordable to some consumers or they may seek other substitutes. As a result, the remaining consumers in the market lose some of their surplus. The producers, on the other hand, may gain surplus due to the higher price, but not all of the surplus will be transferred to them as some of it may be lost due to decreased demand. Therefore, option C is the best choice as it captures both the loss of surplus for some consumers and the potential gain of surplus for some producers while acknowledging that not all surplus will be transferred to them.

Assume a Market Price Is Set Artificially High