5. How has the price ceiling affected producer surplus? Why did it have this eff

Question

5. How has the price ceiling affected producer surplus? Why did it have this effect?


6. Has a deadweight loss been created? Why? Does the price ceiling cause economic inefficiency?


7. How does the elasticity of supply and demand affect the price ceiling’s affect on producer and consumer surpluses?


8. If the price ceiling were removed, what would happen to the price of gasoline in the near term? Is it fair that the available gasoline would only go to those people who are willing and able to pay the higher price? In being willing to pay more, does this mean that these people value gas more highly? What ideas of fairness presented in your text do you think apply in this case?


9. Why do you think there has been no suggestion of imposing a price ceiling on gasoline given current events in this market?

Explanation / Answer

Sorry, I kind of answered 5 and 6 in the last post. 5. PS has increased. The reduction in P and the inelasticity of supply and demand caused this PS to increase. 6. Due to government intervention, there is a dead weight loss denoted by the triangle from the old equilibrium to the new one. This is because the market is not opperating under free conditions and price and quantity are notat equlibrium. This price ceiling does cause economic inefficiency since there is a social loss (dead weight loss). 7. Since the elasticity of both supply and demand are so inelastic, the afect on CS and PS are extreme. The more inelastic supply and demand, the more affect there is on both CS and PS. 8. In the near term, price would rise back to equilibrium. This is the fair point, since it is what the market is demanding denoted by the market demand curve. People will pay the higher prices and the ones who cannot afford it will wait. In the short run, the price will fluctuate and be lowered to their marginal willingness to pay. Since some are willing to pay more for the gas, they are more willing to pay and have a higher utility for the gas, therefore they do value the gas higher than others with lower demand. The only limited factor to fairness would be that gas is a good that will not last forever. This may hinder some in driving or owning their personal meens of transportation. To be fair, they do have access to transportation via public entities. 9. In our market, there has been no talk of price ceilings because the reduction in social welfaare that will be caused. This dead weight loss is hindering to society and having a free market outweights this cost.

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