If the government removes a binding price floor from a market, then the price paid by buyers will:

• A. remain unchanged
• B. increase above the previous price floor
• C. decrease to the equilibrium price
• D. become negative

Answer: (C)

Verified step by step guidance

1. Understand what a binding price floor is: it is a government-imposed minimum price set above the market equilibrium price, which prevents the price from falling to its natural equilibrium level.
2. Recognize that when a binding price floor is in place, the market price cannot go below this floor, so the price paid by buyers is at least the floor price, which is higher than the equilibrium price.
3. When the government removes this binding price floor, the restriction preventing the price from falling is lifted, allowing the price to adjust freely according to supply and demand.
4. Since the price floor was above equilibrium, removing it means the price will move down from the floor level toward the equilibrium price where quantity demanded equals quantity supplied.
5. Therefore, the price paid by buyers will decrease from the previous price floor level to the equilibrium price, reflecting the natural market-clearing price without government intervention.