Chapter 4, Problem 4.5LO

To determine

Total surplus and allocative inefficiency due to governemt regulation of price floor

Concept introduction:

Economic Regulation- The government imposed restrictions on firm decisions over the price, quantity and entry and exit.

Price Floor- It is the Government imposed price control or the minimum price at which the commodity can be sold. It is a government control aimed at preventing the prices from falling too low. It has a major appliaction in labor wages and prices of agricultural produce.

Government imposed quantity restriction- It is the maximum quantity that can be produced in the market. The examples of such restrictions are Licencing and import quota.

Producers’ Surplus- An economic measure of the difference between price the producer receives for an output and the minimum price at which he is willing to sell the product. It is an aggregate of the producers’ gain in selling a given level of output in the market.

Consumers’ Surplus- An economic meaure of the difference between what the consumers are willing to pay for the purchase of a given level of output and what he actually pays for it. It is an aggregate of the consumers’ gain in purchasing a given level of output in the market.

Dead weight loss- The fall in the total surplus consequent upon a market distortion like governemnt regulation like price ceiling, price floor or tax etc. It leads to allocative inefficiency.