France pours away wine to prop up collapsing prices amid glut

This season France has destroyed large quantities of wine as falling consumption has triggered a collapse in the equilibrium price of wine. With demand contracting sharply, the market faces excess supply that would push prices down precipitously. By deliberately reducing output — or in this extreme case discarding wine — producers and the state seek to stabilise prices and protect farmers’ revenues. Otherwise, unrestrained competition would force a painful price adjustment, undermining many small producers who cannot survive in a low-price market.

France to spend €200m destroying wine as demand falls - BBC News

1. Explain the term excess supply using a demand and supply diagram. Show how it arises when the market price is above equilibrium.

2. Using the supply and demand framework, explain how pouring away surplus wine could help increase the equilibrium price in the French wine market.

3. Discuss the potential benefits and costs of France’s decision to destroy excess wine. In your answer, consider the impact on producers, consumers, government finances and long-term market efficiency.