Multiple Choice
Consider a supply and demand graph where a binding price floor is set above the equilibrium price. What does the deadweight loss associated with the price floor represent?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Price Ceilings, Price Floors, and Black Markets
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A nonbinding price floor has which of the following consequences?
A
It causes a surplus of the good.
B
It leads to a shortage of the good.
C
It creates a black market for the good.
D
It has no effect on the market outcome.
Verified step by step guidance1
Understand what a price floor is: a legally imposed minimum price that sellers can charge for a good or service.
Recognize that a price floor is binding only if it is set above the equilibrium price, meaning it affects the market by preventing prices from falling to the equilibrium level.
Analyze what happens if the price floor is nonbinding, i.e., set below the equilibrium price: since the market price is already above the floor, the floor does not restrict the price.
Conclude that because the nonbinding price floor does not change the market price, it does not cause a surplus (excess supply) or shortage (excess demand), nor does it create incentives for black markets.
Therefore, a nonbinding price floor has no effect on the market outcome, as the equilibrium price and quantity remain unchanged.
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