Suppose that you are the economic adviser to a local government in Uttarakhand, India that has to deal with a politically embarrassing surplus that was caused by a price floor on milk that the government recently imposed. Your first suggestion is to get rid of the price floor. Explain how and why price floors distorts markets.
Since the politicians don’t want to get rid of the price floor, they present you with the following list of options that they hope will get rid of the surplus while keeping the price floor. Identify each one as either could work or can’t work. Explain your answers. Based on your analysis, what is your recommendation and why.
a. Restricting supply . b. Decreasing demand c. Purchasing the surplus at the floor price
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