explain whether each of the following increases, decreases, or stays the same after a price ceiling:...

explain whether each of the following increases, decreases, or stays the same after a price ceiling:
a. Consumer surplus
b. Producer surplus
c. Total welfare

Solutions

Expert Solution

The price ceiling is a legal maximum price which can be charged by the sellers and it is set below the equilibrium price. The price ceiling imposed by the government leads shortage of goods.

If price ceiling is set below the equilibrium price, then it will be binding and if it is set above the equilibrium price, then it will be not binding.

Hence due to presence of effective price ceiling, the quantity traded in the market decrease. As a result consumer surplus increases because price has decreased. But producer surplus will decrease because price is lower.

Since less than the equilibrium quantity is traded. Hence there will be some dead weight loss. Hence welfare will decrease.

Since the consumer surplus is the area below the demand curve and above the price. In other words, the consumer surplus is the difference of maximum willingness to pay for any good and price of that good.

Demand curve shows the maximum willingness to pay for any goods or services.

Producer surplus is the area below price and above the domestic supply curve.

It means that

Consumer surplus increase.

Producer surplus decrease.

Total surplus decrease. Hence total welfare decrease.

Rahul Sunny answered 1 year ago

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