Final answer:
Excess supply is eliminated by falling prices, as the free market's price mechanism encourages an equilibrium where the quantity demanded and supplied are aligned, negating the excess. Price floors and price ceilings can interfere with this process, potentially leading to deadweight loss and a decrease in the economy's social surplus.
Step-by-step explanation:
If the price mechanism is allowed to work freely, excess supply is eliminated by falling prices. When the market has an excess supply, it means that the quantity supplied exceeds the quantity demanded at the current price level. In a free market, the price of the product would decrease to restore the balance, making goods more attractive to consumers and perhaps less profitable to produce, thus reducing the quantity supplied. In this situation, sellers may lower their prices in order to clear their stock, which simultaneously makes the product more appealing to consumers, who increase their demand in response to lower prices. Through the law of demand and supply, prices will tend to move towards an equilibrium where the quantity demanded and supplied align, thereby correcting any excess.
When the market dynamics are not interfered with by price floors or price ceilings, the price mechanism can operate efficiently. Price floors, such as minimum wage laws, can lead to excess supply when the price set is above the equilibrium, as in the case of surplus crops or unemployment. On the other hand, price ceilings, like rent control, can lead to shortages because the price is set below the equilibrium, which discourages production and increases demand. Both interventions can result in deadweight loss, where the loss of economic efficiency can lead to a decrease in the total surplus that is available to society.