Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
They create a price ceiling that prevents transactions above a certain level.
B
They can lead to a surplus of goods that consumers do not want.
C
They distort the natural price signals, causing misallocation of resources.
D
They ensure that all consumers can afford the goods regardless of market conditions.
Understanding the Answer
Let's break down why this is correct
Answer
Government price controls, like price ceilings or price floors, can create a deadweight loss because they disrupt the natural balance of supply and demand in a market. For example, if the government sets a price ceiling on rent, landlords may not want to rent out their properties because they can't charge enough to cover their costs. This leads to fewer available apartments, meaning that some people who want to rent can't find a place. As a result, the overall market becomes less efficient, and the total welfare of both consumers and producers decreases, creating a deadweight loss. Essentially, when prices are not allowed to adjust freely, the market cannot reach an optimal point where supply meets demand.
Detailed Explanation
Price controls change how prices work in a market. Other options are incorrect because Some might think that a price ceiling only stops high prices; It's easy to think that price controls always create extra goods.
Key Concepts
Government interventions
Market efficiency
Deadweight loss
Topic
Government Policies and Market Efficiency
Difficulty
easy level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.