MC Qu. 98 A government-imposed price floor has what ef...

A government-imposed price floor has what effect on efficiency?

Question

MC Qu. 98 A government-imposed price floor has what ef...

A government-imposed price floor has what effect on efficiency?

BlackTom AI · Accepted Answer

Beginning with the general effect of a government-imposed price floor: when the floor is above the market-clearing price, it creates a surplus and distorts allocation, leading to inefficiencies overall.
Option 1: 'There is little dead weight loss.' This is incorrect because a binding price floor prevents some trades that would have occurred at the equilibrium, creating dead weight loss due to the missed gains from trade.
Option 2: 'Consumer and producer surplus increases.' This is misleading. While some producers may gain from the higher price, consumers pay more and buy less, and the overall combined surplus typically falls due to the deadweight loss and misallocation, so both surpluses do not increase together.
Option 3: 'Consumer surplus decreases.' This is correct because the higher price reduces the quantity purchased by consumers and raises what they pay, reducing the area representing consumer surplus on the graph.
Option 4: 'Producer surplus increases.' Although the price floor raises the price that some producers receive, the reduction in quantity sold and the resulting deadweight loss mean that producer surplus does not universally rise for all producers; some producers lose from unsold units. On balance, this statement is not guaranteed and is generally not the defining effect highlighted in standard analyses of binding price floors.

MC Qu. 98 A government-imposed price floor has what ef... A government-imposed price floor has what effect on efficiency?

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