Suppose a binding price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia.What will be the likely effect on the market for sparkling wine in Vinyardia?
A)Consumer surplus will increase.
B)Producer surplus will increase.
C)Deadweight loss will increase.
D)Market efficiency will increase.

Question

Quizplus · Accepted Answer

A binding price floor leads to a situation where the market price of sparkling wine is artificially set higher than the equilibrium price. Consequently, there will be an excess supply of sparkling wine, and some producers will not find buyers at the higher price. This situation leads to a deadweight loss, which is the loss in social welfare due to the inefficient allocation of resources. The surplus increase for the producer could be possible only if the demand remains constant, which is highly unlikely in this case. Therefore, the correct answer is C, deadweight loss will increase.

Suppose a Binding Price Floor on Sparkling Wine Is Proposed