Question

In: Economics

Explain diagrammatically the various ways in which a price ceiling on gasoline that is set below...

Explain diagrammatically the various ways in which a price ceiling on gasoline that is set below the equilibrium price would make buyers and sellers of gasoline better off or worse off. What would happen to total surplus and deadweight loss in this market?

Solutions

Expert Solution

Price ceiling is type of price control implemented by the government or any other authority over the prices in a market, setting the selling price below current market price for goods and services. These efforts are taken in order to make the said commodity or service more affordable and to protect consumer interest from exploitation by the producers.

Let us see the Gasoline market conditions of equilibrium price and supply before price control:

Total Surplus = Consumer Surplus + Producer Surplus.

Equilibrium price and quantity are P and Q respectively.

Now, in the above case of the Gasoline market, there is a price ceiling set below equilibrium price ( Price Control). Let us see another diagram;

We see that the price ceiling initiative has set the price levels below the equilibrium price, at (P1). This makes producers in the gasoline market leave the industry, as prices are lesser to the point where earning higher profits is difficult. Now as prices are low , consumers demand gas more yet supply for gas has decreased. Therefore we see an instance of excess demand and shortage of supply in the market as quantity supplied of gasoline is lesser than the demand for it.

Also, consumer surplus increases as they pay even more less for the gas they purchase , thus inducing consumer surplus to rise. Yet producer surplus decreases as they are not able to sell at higher prices and prices are intentionally set lower by authorities, thus leading to a decrease in producer surplus.

The Total Surplus before the price ceiling is greater than the the Total Surplus after price ceiling and the difference between them is the dead weight loss created in the market.

Producers are worse off in the short run as their revenue is reduced, yet even though consumers enjoy lower prices in the short run, the excess demand and the shortage in supply in the market will induce the prices to go up.

In conclusion, as a result of a price ceiling in the gasoline market, the total surplus reduces along with increasing the dead weight loss in the market. Producers are worse off in the short run due to reduced prices and even though consumers enjoy low prices in the short run, the excess demand and shortage of supply in the market would induce the price levels to eventually rise.


Related Solutions

Explain diagrammatically the various ways in which a price ceiling on gasoline that is set below...
Explain diagrammatically the various ways in which a price ceiling on gasoline that is set below the equilibrium price would make buyers and sellers of gasoline better off or worse off. What would happen to total surplus and deadweight loss in this market?
There are various ways in which presidents can set the agenda, such as the State of...
There are various ways in which presidents can set the agenda, such as the State of the Union address, bully pulpit, etc. Identify an example of a president setting the agenda. Were they successful? Why or why not?
One of the consequences of a government imposed rent control ceiling with the ceiling set below...
One of the consequences of a government imposed rent control ceiling with the ceiling set below the equilibrium rental price is: Select one: a. a surplus of apartments. b. a shortage of apartments. c. decreased search activity of people who want to rent apartments. d. an increase in maintenance and additional amenities like swimming pools and free cable
For a product with common price of 5, a price ceiling of 2 has beet set...
For a product with common price of 5, a price ceiling of 2 has beet set which is lower than the common price. Explain in details, the impact, advantages and disadvantages of the price ceiling to the market and the customers. Explain with a simple diagram.
Discuss the various ways in which MNCs set up, or control, production in other countries. Support...
Discuss the various ways in which MNCs set up, or control, production in other countries. Support your discussion with horizontal and vertical integration strategies applied by MNCs.
“Price ceiling is the maximum legal price that can be charged in a market ”. Explain...
“Price ceiling is the maximum legal price that can be charged in a market ”. Explain why a “price-ceiling policy” can reduce social welfare? Explain the implications the business?
Please discuss and elaborate on the price ceiling and price floor ? are they efficient? explain...
Please discuss and elaborate on the price ceiling and price floor ? are they efficient? explain the consequences?
What would happen if the government set a ceiling on the price of gas? What could...
What would happen if the government set a ceiling on the price of gas? What could change in supply and demand, would you end up better off since the price is low, or would you end up without any gas because there is a shortage? Would it be feasible to think that doing so would lead to black markets?
Explain the various ways in which changes in income and the prices of other goods affect...
Explain the various ways in which changes in income and the prices of other goods affect the elasticity of demand for a particular good.
Explain various ways in which bacteria can attach to host cell surfaces.
Explain various ways in which bacteria can attach to host cell surfaces.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT