Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
They eliminate deadweight loss by increasing total welfare.
B
They create deadweight loss by causing a reduction in quantity supplied.
C
They have no impact on deadweight loss.
D
They increase consumer surplus without affecting producer surplus.
Understanding the Answer
Let's break down why this is correct
Answer
A price ceiling is a maximum price set by the government that sellers can charge for a good or service. When a price ceiling is lower than the market equilibrium price, it can lead to a shortage because more people want to buy the product at the lower price, but sellers may not want to supply as much. This imbalance creates deadweight loss, which is the loss of economic efficiency that occurs when the quantity of a good traded is less than what would happen in a free market. For example, if the government sets a price ceiling on rental apartments, more people may want to rent them, but landlords may not offer enough apartments, leading to fewer rentals available than needed. This situation means that both buyers and sellers miss out on potential benefits, resulting in a loss to the overall economy.
Detailed Explanation
Price ceilings limit how high prices can go. Other options are incorrect because Some might think price ceilings help everyone by increasing total welfare; It's a common belief that price ceilings don't change anything.
Key Concepts
price ceilings
welfare economics
Topic
Deadweight Loss in Pricing
Difficulty
medium level question
Cognitive Level
understand
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