In Allentown, Pennsylvania, in the summer of 2014, the...

In Allentown, Pennsylvania, in the summer of $2014,$ the average price of a gallon of gasoline was $\$ 3.68-$ a 22-cent increase from the year before. Many consumers were upset by the increase. One consumer was quoted in a local news- paper as saying, "It's crazy. The government should step in." Suppose the government had stepped in and imposed a price ceiling equal to the old price of $\$ 3.46$ per gallon. a. Draw a graph showing the effect of the price ceiling on the market for gasoline. Be sure that your graph shows: i. The price and quantity of gasoline before and af- ter the price ceiling is imposed ii. The areas representing consumer surplus and producer surplus before and after the price ceiling is imposed iii. The area of deadweight loss b. Will the consumer who was complaining about the increase in the price of gasoline definitely be made better off by the price ceiling? Briefly explain.

In Allentown, Pennsylvania, in the summer of $2014,$ the average price of a gallon of gasoline was $\$ 3.68-$ a 22-cent increase from the year before. Many consumers were upset by the increase. One consumer was quoted in a local news- paper as saying, "It's crazy. The government should step in." Suppose the government had stepped in and imposed a price ceiling equal to the old price of $\$ 3.46$ per gallon.
a. Draw a graph showing the effect of the price ceiling on the market for gasoline. Be sure that your graph shows:
i. The price and quantity of gasoline before and af- ter the price ceiling is imposed
ii. The areas representing consumer surplus and producer surplus before and after the price ceiling is imposed
iii. The area of deadweight loss
b. Will the consumer who was complaining about the increase in the price of gasoline definitely be made better off by the price ceiling? Briefly explain.

Key Concepts

Price Ceiling

A price ceiling is a government-imposed limit on how high a price can be charged for a product. It is typically set below the market equilibrium price to make the good more affordable for consumers. However, by capping prices, price ceilings can lead to a shortage if the artificially low price stimulates demand while discouraging supply, disrupting the balance between supply and demand.

Market Equilibrium

Market equilibrium is the point where the quantity demanded by consumers equals the quantity supplied by producers, with no shortage or surplus. It is determined by the intersection of the supply and demand curves. Disruptions such as price ceilings force the market away from this equilibrium, resulting in inefficiencies and potential shortages.

Consumer Surplus

Consumer surplus is the difference between what consumers are willing to pay for a good versus what they actually pay. When a price ceiling is imposed, the consumer surplus can increase for transactions that still occur at the lower price. However, if the price ceiling causes a shortage, not all consumers who would have purchased the product at the equilibrium price can do so, potentially limiting the overall gains in consumer surplus.

Producer Surplus

Producer surplus is the difference between the price at which producers are willing to sell a product and the actual price they receive. With a price ceiling, the lower price reduces the producer surplus because producers receive less revenue per unit sold. This reduction in profit margin can discourage production, contributing to the shortage in the market.

Deadweight Loss

Deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achieved due to market distortions like price ceilings. It represents the lost gains from trade where either consumers or producers, or both, would have benefitted from transactions that no longer occur because of the imposed price limitation.

Transcript

00:01 Okay, so for this question, let's firstly draw the graph.

00:10 We have quantity, we have price, we have demand curve, and we have supply curve.

00:16 Okay, so if the market trying to achieve the equilibrium itself, the equivalent price is $3 .68.

00:24 And we don't know the exact quantity, but we know we use q star to stand for it.

00:30 That is the equilibrium quantity.

00:32 Okay, so if the market can achieve the equivalent itself, we know that this large triangle here is consumer surplus and this triangle here is producer surplus by definition and total support is simply consumer surplus plus plus producer support and there's no that weight loss right and the question say that some one of the consumer complaining about this higher price compared with the last year so the market is set of price selling and the price selling is $3 .46.

01:13 So this $3 .46, it is a price selling.

01:18 And this price selling is lower than the market equivalent price.

01:22 That means the market price now has to be $3 .46.

01:27 So if that's the case, the quantity demanded in the market is, let's say, this is quantity demanded, and this is quantity supplied.

01:39 So the quantity management in the market is higher than quantity supplied.

01:44 Consumers are more likely to buy goods when the price is lower, but producers are less likely to supply good when the price is lower.

01:53 So in this case, you will see that the new consumer surplus would be this area here.

02:04 So let's use the cs prime to stand for it.

02:08 So the new cs prime is greater than the price.

02:12 Previous cs.

02:14 So consumer surplus increase.

02:17 But what about producer surplus? producer subplus, the new producer surplus is this triangle here...

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