Question

Lovers of classic music persuade Parliament to impose a binding price ceiling of $40 per concert ticket. Answer the following questions:

a. Draw a demand and supply diagram of the concert ticket to show the price ceiling.

b. As a result of the policy, do more or fewer people attend classical music concerts? Explain.

c. Label or shade the areas of consumer surplus and producer surplus in your diagram.

d. Summarize three negative consequences of this policy.

Answer 1

Answer a :-

In the given figure the supply and demand curve intersect each other at point E which is a equilibrium point.  Ep is the equilibrium price and Eq is the equilibrium quantity without any price ceiling in the market. Now when price ceiling is imposed which is much below the equilibrium price Ep, the new price falls down to Pc due to which the quantity supplied becomes Qs and the quantity demanded becomes Qd . This leads to shortage in the market where the supply is less than the demand of music concerts .

Answer b :-

It must be noted that due to decrease in price of the classical music concert, the demand for the concert will increase . However the supply of the the concerts will reduce, creating shortage in the market . Thus the overall effect is that fewer people attend classical music concerts

Answer c :-

Before the price ceiling was imposed, the consumers surplus was marked by Triangle EEpZ and the producer surplus was marked by the triangle EEp0. Now due to shortage in the market where the quantity supplied is less than quantity demanded, the new producer surplus decreases and is marked by the red triangle, the new consumer surplus increases and is marked by the blue outline and the green triangle represents the deadweight loss in the society .

Answer d :-

Three negative consequences of a price ceiling policy are :-

1. As many good artist doesn't want to perform at such a lower price, this will reduce the supply of the good artists in the market . The price ceiling increases the amount of lower quality of products in the market
2. Usually price ceiling causes shortage in the market because the quantity supplied at lower price is less than the quantity demanded at this price.
3. Price ceiling creates deadweight loss in the society and creates extra burden on the producers of the service by decreasing their producer surplus.