Use a diagram to show CS ; PS , and DWL , ES when the market is:
A) In equilibrium at a line of $5.
B) When there is a price ceiling of $3.
The government occasionally sets a maximum price that is allowed to be charged for a good or service. Typically the government does this for goods that are believed to be a necessity, so they should be affordable, such as rent control. Another example would be to prevent people from being taken advantage of. This is the idea behind price-gouging laws.
Answer and Explanation: 1
Looking at the graph below, when the market is in equilibrium consumer surplus is shown by the blue triangle and producer surplus is shown by the orange triangle. At the market equilibrium, total surplus to society is maximized.
When the government imposes a price ceiling at $3, the producer surplus shrinks, as shown in the graph below. A lower quantity of the good is sold, so although those consumer who are able to procure that good are better off, there are many people willing to pay $3 who cannot purchase the good due to a shortage. The green triangle represents the deadweight loss to society that exists because of the price ceiling. It is the value of the sales that are not taking place.
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Learn more about this topic:
fromChapter 3 / Lesson 67
Learn the price ceiling definition in economics. See a price ceiling example to compare the difference between a price ceiling vs price floor.