A binding price floor leads to excess supply. The free-market
equilibrium is at E, with price and quantity The government now
establishes a binding price floor at Actual quantity exchanged is then
and there is excess supply equal to
Binding price floors lead to excess supply. Either an unsold surplus will exist, or someone
(usually the government) must enter the market and buy the excess supply.The consequences of excess supply differ from product to product. If the
product is labour services, subject to a minimum wage, excess supply
translates into people without jobs (unemployment). If the product is
wheat, and more is produced than can be sold to consumers, the surplus
wheat will accumulate in grain elevators or government warehouses.
These consequences may or may not be worthwhile in terms of the other
goals achieved. But worthwhile or not, these consequences are inevitable
in a competitive market whenever a price floor is set above the market-
clearing equilibrium price.
Why might the government want to implement a policy that leads to
these results? One reason is that the people who succeed in selling their
p 0 Q 0.
p 1.
Q 1 , Q 1 Q 2.