Select a product and for that the government places a mandated price ABOVE the equilibrium price, based on your research how would this affect the market equilibrium, explain your view.
If the government places a mandated price above the equilibrium price for a product, it creates a situation where there is a surplus or excess supply in the market. Here's an explanation of the effect of such a policy on the market equilibrium:
1. Understanding Equilibrium Price: The equilibrium price is determined by the interaction of supply and demand in the market. It is the price at which the quantity demanded by consumers is equal to the quantity supplied by producers. This point of equilibrium represents the most efficient allocation of resources in the market.
2. Government Intervention: When the government sets a mandated price above the equilibrium price, it is implementing a price floor. The price floor creates a legal minimum price that sellers must charge above the equilibrium level.
3. Surplus Creation: Setting a mandated price above the equilibrium means that sellers are now legally required to sell their product at a higher price than what the market would naturally dictate. As a result, there is likely to be excess supply since the quantity supplied will exceed the quantity demanded at the higher price.
4. Effects on Market Equilibrium: The surplus created by the mandated price above equilibrium can lead to several outcomes:
- Excess Inventory: Sellers will accumulate stocks of unsold goods as demand decreases due to the higher price. This excess inventory can be costly for suppliers and lead to increased storage costs.
- Reduced Production: Sellers may reduce their production levels to avoid accumulating further excess stock. This reduction in production can have implications for employment and economic growth.
- Decreased Consumer Welfare: Higher prices resulting from the price floor can make the product less affordable for consumers. As a result, consumer welfare may decrease as they have to pay more for the product.
- Black Markets: Mandated prices above the equilibrium often create incentives for illicit markets, such as black markets, where the product is sold at prices below the mandated price.
Overall, by setting a mandated price above the equilibrium, the government can disrupt the market dynamics and create a surplus. This intervention can have unintended consequences on both producers and consumers, leading to inefficiencies in resource allocation and potentially distorting market behaviors.