Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Social welfare decreases because it leads to a shortage of goods, creating inefficiencies.
B
Social welfare increases as consumers benefit from lower prices, leading to higher demand.
C
Social welfare remains unchanged since price ceilings do not affect production levels.
D
Social welfare improves because it eliminates excess supply in the market.
Understanding the Answer
Let's break down why this is correct
Answer
When a government sets a price ceiling below the market equilibrium price, it means that the maximum price for a good or service is lower than what would naturally be charged in a free market. This can lead to a shortage, where more people want to buy the product at the lower price, but producers are not willing to supply enough of it because they cannot cover their costs. For example, if the government puts a price cap on rental apartments, more people might want to rent them, but landlords may decide not to rent out their properties or may reduce the number of apartments available. This shortage can reduce social welfare because not everyone who wants the good can access it, leading to frustration and unmet needs. Overall, the price ceiling disrupts the balance of supply and demand, causing inefficiencies in the market.
Detailed Explanation
When the price is set too low, fewer goods are available. Other options are incorrect because Some might think lower prices always help everyone; It's a common belief that price controls don't change how much is made.
Key Concepts
Socially Optimal Output
Market Efficiency
Government Intervention
Topic
Socially Optimal Output vs. Actual Output
Difficulty
medium level question
Cognitive Level
understand
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