Question

In the recent years, prices of basic food commodities such as corn, rice, and wheat have increased sharply. An article in the Wall Street Journal stated that Chinese authorities were concerned that escalating prices would cause inflation and be followed by civil unrest. (Source: Wall Street Journal, February 20, 2011) If the Chinese government sets a price ceiling below the equilibrium price, the result will be to:__________.

A) increase total surplus.
B) eliminate deadweight loss.
C) create deadweight loss.
D) increase surplus and create deadweight loss.

Answer 1

Answer:C) create deadweight loss.

Explanation:Deadweight loss is the loss of economic efficiency in terms of utility for consumers/producers such that the optimal or allocative efficiency is not achieved. ... The loss of welfare attributed to the shift from earlier to this less efficient market mechanism is called the deadweight loss of taxation.

Examples of Deadweight Loss are:

Price ceilings and rent controls can also create deadweight loss by discouraging production and decreasing the supply of goods, services, or housing below what consumers truly demand. Consumers experience shortages, and producers earn less than they would otherwise.