Under the Common Agricultural Policy (CAP) the European Union uses a number of policies to support the agricultural sectors of member countries. Under a minimum-price policy the government sets a price above the market-equilibrium price.

The EU guarantees farmers minimum prices for products such as grain, dairy products, and wine. This policy causes artificial excess supply: if the minimum price exceeds the market-equilibrium price, the quantity supplied will exceed the quantity demanded. To support the minimum prices, the EU purchases any output that a farmer cannot sell at the guaranteed price and stores the excess supply in facilities labeled by the European press as “butter mountains” and “wine lakes.” In recent years the EU has reformed its agriculture policy by reducing and in some cases eliminating minimum prices. As a result, the butter mountains and wine lakes are shrinking.

Question.

What are consequences of a price above the equilibrium price?