Final Answer:
Price regulation, such as setting the price at p1, can result in preventing individuals from purchasing a good, even if they value it more than it costs to produce. In Figure 11.3, assuming the state sets the price at p1 and S' denotes the supply, some potential buyers whose valuation exceeds the cost won't be able to purchase the good due to the regulated price.
Step-by-step explanation:
In Figure 11.3, suppose the state enforces a price regulation at p1. This regulation impacts the market dynamics by altering the equilibrium price and quantity. Assuming S' represents the supply curve, the intersection of this supply curve with the demand curve at the regulated price of p1 determines the quantity supplied. However, the quantity demanded at this price may exceed the quantity supplied, illustrating a shortage.
When price regulation fixes the price below the equilibrium, it creates excess demand. This situation implies that buyers who are willing to pay more for the good than its regulated price cannot acquire it. Consequently, individuals with higher valuations for the good than the set price are unable to make purchases, leading to an inefficient allocation of resources.
Moreover, the difference between the willingness to pay (valuation) and the regulated price represents the consumer surplus that remains unrealized due to the regulation. This inefficiency highlights how price regulation can prevent transactions between buyers who value the good more than its regulated price, distorting the market's efficiency and potentially leading to deadweight loss.