When a price ceiling is imposed in a competitive market at a level below the equilibrium price:
A)the total surplus is reduced.
B)there is no welfare cost associated with it.
C)the consumer surplus increases more than producer surplus.
D)the producer surplus increases more than consumer surplus.

Question

Quizplus · Accepted Answer

When a price ceiling is set below the equilibrium price, quantity demanded exceeds quantity supplied, and the result is a shortage of the good or service. The shortage leads to a reduction in total surplus, which is the sum of consumer and producer surplus. While consumer surplus may increase due to the lower prices, producer surplus decreases due to the reduced quantity they are able to sell. Therefore, the reduction in producer surplus outweighs any gain in consumer surplus, resulting in a net reduction in total surplus.

When a Price Ceiling Is Imposed in a Competitive Market