Question

Consider a mid-sized city were the number of alcohol related crimes and deaths are noticeably higher than other criminal activities. With a desire to decrease this statistic, the state government decides to restrict the number of establishments selling alcohol. As a result of the government's policy, which of the following market outcome is expected?

All of these answers are correct. The price of alcohol will increase, and bars and similar establishments selling alcohol will make higher profits The price of alcohol will increase Bars and similar establishments selling alcohol will make higher profits. Total welfare will decrease.

Answer 1

Answer is A. All of the above are correct.

When government decreases the number of establishments who sells the alcohol , there will be less competition among existing and they will increase the price of alcohol. Increase in price will increase the profit.

Total welfare is the sum of the producer surplus and consumer surplus, and total welfare get maximises when market are left free. Here increase in price will decrease the welfare of consumers more then the increase in the welfare of producers. So total welfare will decrease.

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