Question

Deadweight loss is a _____________________. A price ceiling results in a deadweight loss when the ceiling price is set ________________ the market clearing price.

1) net loss of consumer and producer surplus; below
2) net loss of consumer and producer surplus; above
3) net loss in output; below
4) net loss in output; above

Answer 1

Deadweight loss is a net loss of consumer and producer surplus that occurs when a price ceiling is set below the market-clearing price, preventing efficient market transactions.

Step-by-step explanation:

Deadweight loss is a net loss of consumer and producer surplus. A price ceiling results in a deadweight loss when the ceiling price is set below the market clearing price. The deadweight loss represents a scenario where potential gains from trade are not realized due to the market being out of equilibrium, often because of price controls like price ceilings. This situation leads to a decrease in social surplus, which includes both consumer and producer surplus.

When a price ceiling is set below the market clearing price, it prevents some transactions that would have benefited both buyers and sellers, resulting in a loss of surplus for both parties that could otherwise have contributed to the overall welfare of society.