The correct answer is Option 2: Buy the surplus at predetermined price
Excess supply occurs when the quantity supplied is greater than the quantity demanded, often due to a price floor (a minimum price set above equilibrium). The government can address this problem in the following ways:
- Removing price floor: This would allow prices to fall and clear the excess supply naturally, but it is not always implemented as it could harm producers.
- Buying the surplus at a predetermined price: This is the most common government intervention, where the government purchases the excess supply to stabilize prices and support producers. This is done through buffer stock programs or minimum support price (MSP) policies in agriculture.
- Enabling traders to buy: While increasing trade can help, it does not guarantee the removal of surplus because traders buy based on market demand, not government intervention.
- Prompting people to buy more: Governments can encourage consumption through subsidies or advertisements, but this approach is not always effective in addressing excess supply immediately.
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