Suppose the government raises the price of cheese above the market equilibrium level (P₀) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the change in consumer surplus after this policy is adopted?

Question

Quizplus · Accepted Answer

By raising the price above the equilibrium level, the quantity demanded decreases (from Q1 to Q2) and the quantity supplied increases (from Q1 to Q3), creating excess supply (Q3-Q2). The government purchases this excess supply and destroys it, which creates a deadweight loss. The loss to consumer surplus is the sum of areas A and B, so consumers lose area A+B.

Suppose the Government Raises the Price of Cheese Above the Market