When a rent ceiling is ________,consumer surplus and producer surplus shrink,a deadweight loss ________,and resources are lost in search activity and evading the rent ceiling law.
A) inefficient; arises
B) inefficient; disappears
C) efficient; arises
D) efficient; disappears
E) nonexistent; arises

Question

Quizplus · Accepted Answer

When a rent ceiling is inefficient (set below the market equilibrium price), it creates a shortage of housing, which leads to a decrease in consumer surplus (as consumers must resort to waiting lists, bribes, or tie-in contracts to obtain a rental unit) and producer surplus (as landlords cannot charge the market price and must accept lower rents), while generating a deadweight loss as some housing units go unoccupied and others are overused. In addition, rent ceilings increase search activity (as more people compete for fewer available units) and encourage illegal practices such as subletting or black markets, causing a waste of resources for law enforcement and compliance. Therefore, A is the best answer. B, C, D, and E are incorrect because they do not describe the consequences of an inefficient rent ceiling.

When a Rent Ceiling Is ________,Consumer Surplus and Producer Surplus