The following will occur when maximum price is fixed below the free market price EXCEPT that
Answer Details
When a maximum price is fixed below the free market price, it can lead to several outcomes due to the restrictions placed on how high a price can go. Here's a breakdown of what typically happens:
1. **Encouragement of Black Market:** When the price ceiling is lower than what would naturally occur, some sellers may not be willing to sell at the lower price. This may encourage them to sell illegally at higher prices, leading to the emergence of a **black market**.
2. **Excess Demand:** A lower price means that more people can afford the product. Therefore, demand for the product increases, but because producers are not willing to supply more at that low price (since they make less profit), there isn't enough product to meet demand. This creates **excess demand**. People want more of the product than is available.
3. **Excess Supply:** This situation is not a consequence of setting a maximum price below the free market price. **Excess supply** happens when the price is too high, resulting in goods remaining unsold as consumers are not willing to buy at that price. But since in this scenario, the price is kept low, the opposite happens: a shortage, not a surplus.
4. **Rationing of Commodities:** To manage the excess demand and ensure fair distribution since there's a shortage, the government or sellers may need to introduce **rationing**. This means setting limits on how much each individual can purchase to prevent the faster depletion of available goods.
In summary, the statement about **excess supply** is the one that would not occur when a maximum price is fixed below the free market level. Instead, you'll have excess demand. This discrepancy is because the artificially low price discourages producers from supplying more of the good.