Question

Define the deadweight loss. Why does a price ceiling usually result in a deadweight loss? How can a price ceiling make consumers better off? Under what conditions might it make them worse off?

Answer 1

Deadweight loss- It is a cost that results due to market inefficiency and it is a situation when demand and supply are not at equilibrium point.

A price ceiling set below the equilibrium price in a perfectly competitive market will result in a deadweight loss because it reduces the quantity supplied by producers. Both producers and consumers lose surplus because less of the good is produced and consumed.

Price ceiling means to set price below the equilibrium price. It is beneficial for poor consumers because they have to pay less price for the purchase of essential commodities.