Question

The minimum support price policy gives rise to which problem?

• A. Excess supply
• B. Excess demand
• C. Low supply
• D. None of these

Hint:

A minimum support price (MSP) can create excess supply when the price is set higher than the market equilibrium.

Answer 1

The Correct Option is A

Step 1: Understanding the concept of minimum support price (MSP).
The minimum support price is a policy implemented by the government to ensure that farmers get a minimum price for their produce, preventing them from selling at a loss. It is intended to support the income of farmers, especially during times of low prices.

Step 2: Analyzing the options.
(A) Excess supply: Correct. When the government sets a minimum support price that is higher than the market equilibrium price, it leads to excess supply, as producers are encouraged to supply more, but demand remains limited at the higher price.
(B) Excess demand: This is incorrect, as excess demand occurs when the price is set too low. At a higher minimum support price, supply exceeds demand.
(C) Low supply: This is incorrect, as the policy aims to support farmers and increase supply by guaranteeing a minimum price.
(D) None of these: This option is incorrect, as the correct answer is (A) Excess supply.

Step 3: Conclusion.
The minimum support price policy leads to excess supply when the set price is above the equilibrium market price.