Final answer:
A binding price ceiling causes price to lose its rationing function, creates a shortage where quantity demanded exceeds quantity supplied, and can make both consumers and producers worse off as it leads to fewer transactions and a reduced social surplus.
Step-by-step explanation:
When a binding price ceiling is imposed on a market:
- a) Price no longer serves as a rationing device because the market price is kept below the equilibrium, leading to a shortage as the quantity demanded (Qd) will exceed the quantity supplied (Qs).
- b) Quantity demanded will not always equal quantity supplied; instead, it creates a situation where consumers wish to buy more than what producers are willing to sell at the capped price.
- c) Consumers are not always better off as the reduced price may benefit those who can purchase the product, but it also creates a shortage that makes it harder for many consumers to obtain the product at all.
- d) Producers are generally worse off because they are forced to sell at lower prices, which could mean selling below cost, reducing their profits, and possibly the quality of the goods.
Both price ceilings and floors reduce the number of transactions and subsequently the social surplus, making the overall effect negative for the market.