Question

Sometimes, a price ceiling can increase Consumer Surplus compared to the market equilibrium. Under what conditions does this occur, and how does this relate to the elasticity of demand?

Answer 1

A price ceiling is a price which is below the pareto efficient market price where consumer will be able to purchase the product at lower prices than of it's average prices and thus, there can be consumer surplus. Consumer Surplus is the difference beween the prices what consumer is prepared to pay and what he actually paid. If the prices fall due to price ceiling, the consumer will be prepared to pay more for the product but due to lower prices, the actual price paid by him will be less and this is how he can be in surplus.Price floor is basically a legal minimum price for the consumer. It is set below the equilibrium price due to which demand of the product can exceed it's supply which can cause shortage of product. The case of price ceiling which result in consumer surplus can be a formation of a union. For example, if farmers get united against highprices of fertilizers and seeds, and to control the situation government puts a price ceiling on the prices of fertilizers, then this will result in the increased demnad of fertilizers and will result in consumer surplus. In perfect competition market, the effect of price ceiling on consumer surlus is ambiguous whereas in monopoly market, consumer surplus will increase until the optimal price is reached and then become ambiguous. In monopoly market, consumer surplus will be more whan the price ceiling range will be equal to optimal price,. The price ceiling would be more effective for consumer surplus when the prices will be belowof that of equilibrium price. If due to price ceiling, demand curve is relatively elastic, then the change in consumer surplus will be net positive whereas production surplus will be negative.