Question

1. Graphically illustrate a price ceiling graph, welfare loss, and redistribution from sellers to buyers. Discuss a real-world case analysis.

Answer 1

Price ceiling refers to the price that is set by the government of a particular nation below the prevailing equilibrium price level in an economy. Price ceiling will lead to create the shortage in the economy as there is an excess demand for the goods. Beyond this price level, the producers can't sell their merchandise. For instance, the government can set the greatest or maximum lease to be charged by the apartment proprietors from the tenants in the metropolitan territories. Hence, a binding price ceiling would create deadweight loss.

This can be shown in below figure:

Deadweight loss will be indicated by the area (E + F).

Consumer surplus = Falls from area (A + B + E) to area (A + B + C)

Producer surplus = Falls from area (C + D + F) to area D