A new law applied to a competitive market that requires laid off workers be paid a large severance payment will
A) not generate a deadweight loss.
B) increase total welfare.
C) increase consumer surplus in the market.
D) decrease consumer surplus in the market.

Question

Quizplus · Accepted Answer

The severance payment increases the cost for firms of providing labor, leading to a decrease in labor demand and a decrease in consumer surplus in the market. The higher cost of production may also lead to higher prices for consumers, further exacerbating the decrease in consumer surplus. There may be some transfer of surplus from firms to laid off workers, but overall the policy is likely to have a negative impact on consumer surplus in the market. A deadweight loss may also be generated if the severance payment results in some firms reducing their output or exiting the market altogether.

A New Law Applied to a Competitive Market That Requires