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

Question

Quizplus · Accepted Answer

When the price is set artificially low, it creates excess demand in the market. As a result, some producers may drop out of the market because they cannot afford to produce at such low prices. This decrease in supply can lead to a shortage of the good, causing some consumers to be unable to purchase it. Therefore, not all consumers will gain surplus, and not all producers will lose surplus. Only those producers who drop out of the market will lose surplus.

Assume a Market Price Is Set Artificially Low