When a government sets a price floor, what is the expected outcome?

Question

BlackTom AI · Accepted Answer

The question asks about the outcome when a government sets a price floor. 
Option 1: 'There is no effect on the market.' This is misleading because a price floor, when set above the equilibrium price, prevents the market from reaching the natural equilibrium, creating distortions. Thus, this choice is incorrect.
Option 2: 'Price will always fall.' In reality, a price floor acts as a minimum price and, if above the equilibrium, will keep prices from falling to market-clearing levels. Therefore, this statement is false in typical scenarios where the floor is binding.
Option 3: 'A surplus occurs if the floor is above equilibrium.' This accurately describes the classic result: setting a floor above the equilibrium price leads to quantity supplied exceeding quantity demanded, creating a surplus. This option is correct.
Option 4: 'A shortage occurs at all times.' A price floor above equilibrium does not cause a shortage; a shortage is associated with price ceilings below equilibrium. Hence this option is incorrect.

When a government sets a price floor, what is the expected outcome?

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