Chapter 2R, Problem 25MCQ

To determine

The question requires us to determine the term for the lost gains when transactions do not occur due to the controls on price and quantity.

Explanation of Solution

Price controls like quota generate inefficiency in the market because at quota sellers charge a supply price that is different from the consumer’s demand price. Both sellers and consumers face loss during the transaction as sellers receive less than their willingness to accept and buyers pay more than their willingness to pay. This loss is termed a deadweight loss. Generally, when the demand price lies above the supply price, there will be a deadweight loss in the market.

The following graph represents the demand and supply curves along with the quota sets by the government:

  

Without government interference, market was at equilibrium at point E where the

Equilibrium price = $14

The equilibrium quantity of swordfish = 9 million pounds.

When government sets a quota of 7 million pounds, the producers will charge $12 as the supply price and the consumer will pay $18 as the demand price.

In the given figure, the triangle ABE represents the deadweight loss in the market for swordfish.

When transactions do not occur due to the quota, the deadweight loss represents the lost gains.

The option “e” is correct.