Brilliant Price Ceilings
Brilliant Industries produces a consumer good called problems . Currently, problems are selling for the market equilibrium price. If an effective price ceiling is implemented in the market for problems, which of the following must occur immediately afterward?
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1 solution
An effective price ceiling will decrease the maximum price a good can be sold for to below the market equilibrium price. Because of this price decrease, fewer producers will be willing to produce problems. Graphically, we are reducing the area of the producer surplus by bringing the maximum possible price below the equilibrium price. Therefore, producer surplus will decrease.
On the other hand, due to the drop in price of problems from the price ceiling, consumers will have a greater surplus. However, this may be offset by the fact that the quantity of problems also decreases, meaning fewer consumers will be able to get ahold of a problem. Since we are not given the magnitude of the price ceiling, we cannot say for sure whether the effect of a decrease in consumers outweighs the effect of a decreased price or not. Graphically, this means that the area removed from the consumer surplus due to the decrease in consumers may or may not be greater than the area added due to the lowering of the price. So, we cannot say whether the consumer surplus will increase or decrease due to the price ceiling.
Therefore, the only conclusion we can draw is that producer surplus decreases .