📚 Learning Guide
Calculating Deadweight Loss
easy

What is the deadweight loss in a market where the equilibrium quantity is reduced due to a price ceiling, based on the supply and demand curves?

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Choose the Best Answer

A

The area of the triangle formed between the supply and demand curves above the price ceiling

B

The total consumer surplus lost due to the price ceiling

C

The total producer surplus gained due to the price ceiling

D

The area of the rectangle formed below the equilibrium price

Understanding the Answer

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Answer

Deadweight loss occurs when the total economic efficiency of a market is reduced, often because of government interventions like price ceilings. When a price ceiling is set below the equilibrium price, it prevents the market from reaching its natural balance, leading to a lower quantity of goods being produced and sold. This means that some consumers who are willing to pay more for the product cannot buy it, and some producers who would be willing to sell at a higher price are unable to do so. For example, if a price ceiling on rent is set below what landlords would charge, fewer apartments will be available, causing some people to miss out on housing. The deadweight loss is represented by the lost transactions that would have occurred at the equilibrium, which are now not happening due to the ceiling.

Detailed Explanation

The deadweight loss is the area of the triangle above the price ceiling. Other options are incorrect because This answer confuses lost consumer surplus with deadweight loss; This option suggests that producers gain from a price ceiling, which is not true.

Key Concepts

supply and demand curves
Topic

Calculating Deadweight Loss

Difficulty

easy level question

Cognitive Level

understand

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