Which of the following transactions fails to produce gains from trade for both buyers and sellers?

• A. A transaction forced by a price floor where the seller receives a higher price but the buyer values the good less than the price paid.
• B. A transaction at the equilibrium price in a competitive market.
• C. A transaction at a price ceiling where the buyer values the good more than the price paid and the seller is willing to sell at that price.
• D. A transaction in a black market where the price is above the legal ceiling and both parties agree voluntarily.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of gains from trade. Gains from trade occur when both the buyer and the seller benefit from a transaction. This means the buyer's valuation of the good is higher than the price paid, and the seller's cost is lower than the price received.
2. Step 2: Analyze the transaction forced by a price floor. A price floor sets a minimum price above the equilibrium price, which can lead to a situation where the seller receives a higher price but the buyer values the good less than the price paid. This means the buyer's benefit is negative, so no gains from trade occur for both parties.
3. Step 3: Consider a transaction at the equilibrium price in a competitive market. At equilibrium, the price balances supply and demand, so buyers value the good at least as much as the price, and sellers are willing to sell at that price, ensuring gains from trade for both.
4. Step 4: Evaluate a transaction at a price ceiling where the buyer values the good more than the price paid and the seller is willing to sell at that price. Since both parties agree voluntarily and the buyer values the good more than the price, gains from trade exist.
5. Step 5: Examine a black market transaction where the price is above the legal ceiling and both parties agree voluntarily. Voluntary agreement implies both buyer and seller expect to benefit, so gains from trade are present.