When a binding price floor is imposed above the equilibrium price, what is the deadweight loss associated with the price floor?

• A. The increase in producer surplus due to the higher price
• B. The area below the demand curve and above the supply curve up to the quantity sold under the price floor
• C. The difference between the price floor and the equilibrium price multiplied by the equilibrium quantity
• D. The loss of total surplus represented by the area between the supply and demand curves from the quantity sold under the price floor to the equilibrium quantity

Answer: (D)

Verified step by step guidance

1. Step 1: Understand what a binding price floor is. A binding price floor is set above the equilibrium price, causing the quantity supplied to exceed the quantity demanded, leading to a surplus in the market.
2. Step 2: Identify the equilibrium price and quantity where the supply and demand curves intersect. This is the point where the market clears without any surplus or shortage.
3. Step 3: Determine the quantity sold under the price floor, which is the quantity demanded at the higher price floor level. This quantity is less than the equilibrium quantity due to the higher price reducing demand.
4. Step 4: Recognize that deadweight loss (DWL) is the loss of total surplus caused by the reduction in trade from the equilibrium quantity to the lower quantity sold under the price floor. It represents the trades that no longer occur because of the price floor.
5. Step 5: Calculate the deadweight loss as the area of the triangle between the supply and demand curves from the quantity sold under the price floor to the equilibrium quantity. Mathematically, this is the area between the supply and demand curves over the range of lost trades.