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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

A government imposes a binding price ceiling below the equilibrium price in a competitive market for rented housing. Which outcome is most certain?

Total surplus falls. A binding price ceiling cuts the quantity supplied, so fewer units are traded than at equilibrium. Trades that benefit both buyers and sellers are lost, creating deadweight loss, even though some buyers who still obtain the good pay less.

  1. AQuantity traded rises above the equilibrium level
  2. BTotal surplus falls because quantity traded falls below the efficient levelCorrect
  3. CProducer surplus rises because of greater demand
  4. DConsumer surplus rises for every consumer in the market
  5. Total surplus is unchanged because the loss to sellers equals the gain to buyers

Explanation

A binding ceiling reduces quantity supplied, so trade falls below the equilibrium quantity. Some mutually beneficial trades are lost, creating deadweight loss. Some buyers gain, but others cannot get the good, so option 3 is wrong. Option 4 ignores the deadweight loss.

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