Question

6b. Price Supply * Pmax Demand Quantity/period Imax This is the market for apartments in City A. Note that the equilibrium price is P'. A widely practiced form of price control in many economies has been rent control. Because governments seek to provide access to rental accommodation for low-income families who cannot afford high city rentals. The local government decides that P is too high and enforces a price ceiling (a maximum prices of P max that landlords can charge. 1. Before the price ceiling, what areas are consumer surplus and what areas are producer surplus? (1 point) 2. What happens to consumer and producer surplus when the price drops to Pmax? (2 points) 3. What happens to social surplus - does it stay the same, increase or decrease with the price ceiling? (1 point)

Answer 1

1) Before price ceiling

CS = A + B

PS = C + E + F  

Total surplus or social surplus = A + B + C + E + F

2) After price ceiling

CS = A + C

PS = F

after price ceiling CS has gone up or increases and PS decreases

3) Total surplus or social surplus after price ceiling = A + C + F

social surplus before price ceiling is A + B + C + E + F

Clearly after price ceiling social surplus has decreased

The area B + E represents loss of social surplus or deadweight loss due to price ceiling