Question

A price floor will always generate a deadweight loss. True or False and explanation.

Answer 1

Answer:TRUE

Price floor: It is similar to price ceiling but in reverse.Price floors are the price controls which prevent business or individuals from charging less than a specific amount for goods/services.

Deadweight loss: Deadweight loss is an expense to society overall that is produced by a financially wasteful allotment of assets with in the market.Deadweight misfortune is otherwise called "excess burden".

●Deadweight loss occurs when supply and demand (the two fundamental forces which drive the economy) are not balanced. Means they do not achieve the equillibrium.

●The result is that allocative efficiency is not as high as it could be-it doesnot reach its maximum level.When the levels of trader are lower,resouce allocation across an economy is likely to become less efficient.

●When supply and demand are not balanced by market forces,consumers may choose not to pay for goods or services beacuse they assess that the prices is not worth th utility that they believe these goods/services will offer.With the overall exchange of items for money being reduced.

●The efficiency of overall resource allocation drops,and then the overall societal welfare drops as well.

Deadweight loss can be caused by four factors

●Taxes

●Price ceilings

●Price floors

●Monopolies.

Price floor will always generate a deadweight loss

Example: Minimum wage- This prevents individuals from selling their labor for less than a certain amount per hour.Minimum wage may increase the unemployment rate (a clear dead weight loss) in cases when emoloyees who need to hire employees who need to hire employees are unable to pay the minimum wage.