Econ 281 Chapter10b - Definition: A price ceiling is a...

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1 Definition:   A  price ceiling  is a legal  maximum on the price per unit that a  producer can receive.  If the price  ceiling is  below  the pre-control  competitive equilibrium price, then the  ceiling is called  binding
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2 A price ceiling always has the following effects: Excess demand will exist The market will underproduce Producer surplus will decrease Some  producer surplus is transferred to the  consumer Consumer surplus may increase or decrease There will be a deadweight loss
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3 Price Ceiling Demand Old Consumer Surplus Q P Q* P* A B C D Old Producer Surplus Supply Price Ceiling
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4 The impact of a price ceiling depends on  which consumer receive the available good.   We will examine the 2 extreme cases: Consumers with greatest willingness to pay  receive good (maximize consumer surplus) Consumers with least willingness to pay  receive good (minimize consumer surplus)
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Econ 281 Chapter10b - Definition: A price ceiling is a...

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