Which of the following is a method the international community has used to reduce the negative effects of price floors in agricultural markets?

• A. Increasing government subsidies to encourage more production
• B. Removing all import restrictions to flood the market with foreign goods
• C. Setting price ceilings below the equilibrium price
• D. Implementing production quotas to limit excess supply

Answer: (D)

Verified step by step guidance

1. Understand the concept of a price floor: it is a minimum price set by the government above the equilibrium price, intended to ensure producers receive a fair income but often leading to excess supply (surplus).
2. Recognize the problem caused by price floors in agricultural markets: when the price floor is above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus of goods.
3. Identify methods to reduce the negative effects of this surplus, such as government buying the excess, export subsidies, or production controls.
4. Focus on production quotas as a method: by limiting the amount farmers can produce, quotas reduce the quantity supplied, helping to align supply closer to demand and reduce surplus.
5. Contrast this with other options like increasing subsidies (which can encourage more production and worsen surplus), removing import restrictions (which affects demand side but not directly the surplus caused by price floors), or setting price ceilings (which is a different policy tool aimed at limiting prices, not related to price floors).