What market consequence results from a price floor that is not respected by sellers?

When a price floor is implemented, it establishes a minimum allowable price for a good or service, intended to ensure that sellers receive a certain level of income. If sellers do not adhere to this price floor, perhaps by selling below this minimum price due to competition or other factors, several market dynamics come into play.

In this case, a price floor that is not respected can lead to a market surplus. This occurs because the higher price set by the floor may reduce the quantity demanded by consumers while sellers, not adhering to the price floor, might still sell their goods at lower prices to entice buyers. Thus, while some sellers might respect the price floor and sell at the mandated price, others undercut these prices, resulting in an excess supply of goods beyond what consumers are willing to purchase at the higher price level.

In a scenario where the price floor is effective and adhered to, market efficiencies might decrease as the quantity supplied exceeds the quantity demanded. However, the failure to respect the price floor disrupts this intended outcome, leading to a surplus rather than a stable market condition.

Understanding this dynamic illustrates the importance of compliance with market regulations and how non-adherence can distort supply and demand equilibrium.