Why do binding price floors cause a deadweight loss in a market?

• A. They increase the quantity demanded above the equilibrium quantity.
• B. They eliminate producer surplus entirely.
• C. They prevent the market from reaching equilibrium, resulting in fewer mutually beneficial trades.
• D. They cause the price to fall below the equilibrium price.

Answer: (C)

Verified step by step guidance

1. Understand what a price floor is: a legally imposed minimum price that must be paid for a good or service, set above the equilibrium price to be binding.
2. Recall that the equilibrium price is where quantity demanded equals quantity supplied, maximizing total surplus (sum of consumer and producer surplus).
3. Recognize that a binding price floor sets the price above equilibrium, causing quantity supplied to exceed quantity demanded, leading to a surplus.
4. Analyze how this surplus means fewer trades occur than at equilibrium because some sellers cannot find buyers at the higher price, reducing mutually beneficial exchanges.
5. Conclude that this reduction in trades causes deadweight loss, which is the loss of total surplus due to the market not operating at equilibrium.