A binding price floor is likely to cause deadweight loss because:
A)buyers incur additional search costs looking for the scarce good.
B)the quantity of the good transacted is less than the equilibrium quantity transacted.
C)a black market emerges and the good sells at prices above the price floor.
D)some buyers who want to buy at the controlled price are unable to find a seller willing to sell at that price.

Question

Quizplus · Accepted Answer

A binding price floor creates a situation where the price of a good is artificially set above the equilibrium price. This leads to a situation where the quantity demanded is less than the quantity supplied, resulting in a surplus of the good. This surplus represents a deadweight loss, as some trades that would have been beneficial to both buyers and sellers do not take place. As the price of the good increases, some potential buyers are priced out of the market, resulting in a reduced quantity transacted. However, A, C, and D are not necessarily outcomes of a binding price floor. While buyers may bear additional search costs when a good is scarce, this is not a direct result of a price floor. Similarly, the emergence of a black market or the inability of some buyers to find sellers who are willing to sell at a specific price may occur in some situations, but they are not inherent consequences of a price floor.

A Binding Price Floor Is Likely to Cause Deadweight Loss