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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 consistent with the standard analysis of market efficiency?

A binding price ceiling below equilibrium cuts the quantity supplied and traded below the efficient level. Trades that would benefit both sides are lost, so total surplus falls and a deadweight loss appears, even though some buyers pay a lower price.

  1. ATotal surplus rises because all consumers pay less
  2. BQuantity traded falls below the efficient level, creating a deadweight lossCorrect
  3. CProducer surplus rises because of excess demand
  4. DQuantity traded rises above the efficient level
  5. Total surplus is unchanged because the loss to producers equals the gain to consumers

Explanation

A binding ceiling reduces quantity supplied below the equilibrium quantity. Some mutually beneficial trades no longer occur, so deadweight loss arises. Option E ignores that the lost trades destroy surplus rather than transfer it.

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