A sales tax on sellers of a good leads to a loss of consumer surplus, but...

A sales tax on sellers of a good leads to a loss of consumer surplus, but a price ceiling or a price floor on that same product will not. True or False?

Expert Solution

The given statement is False.

A sales tax on sellers of a good will lead to a loss of consumer surplus but a price ceiling or a price floor on the same product may also lead to a loss of consumer surplus.

Suppose a binding price ceiling is imposed which is lower than the market price which allows the consumer to purchase the good at a lower price and this would increase the consumer surplus but that does not necessarily occur.The producers will manufacture the good only if they are able to afford it ,as with a lesser price their profitability also declines.So the benefit of lower price will be offset by a decline in the availability of the good. This would lead to a loss of consumer surplus.

When a price floor is imposed on a good and the price is above the equilibrium price than the consumers will have to pay a higher price for the good and a lesser number of consumers would be able to afford it,so the consumer surplus would necessarily decline.

Rahul Sunny answered 2 years ago

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