The total amount of consumer surplus and producer surplus is at its maximum when
A) consumers and producers are allowed to trade at the market clearing price.
B) the government imposes a price floor that is higher than the market clearing price.
C) the government imposes a price ceiling that is lower than the market clearing price.
D) free market exchanges do not exist.

Question

Quizplus · Accepted Answer

Consumer surplus is the difference between the maximum price the consumer is willing to pay and the actual price they pay, while producer surplus is the difference between the minimum price the producer is willing to accept and the actual price they receive. Both consumer and producer surplus are at their maximum when consumers and producers are allowed to trade at the market clearing price, as this ensures that all units of the product are sold and bought at the highest value possible for both parties. A price floor would result in a surplus of the good and deadweight loss, while a price ceiling would lead to a shortage and deadweight loss. The absence of free market exchanges means no consumer or producer surplus exists.

The Total Amount of Consumer Surplus and Producer Surplus Is