Chapter 5, Problem 10P

To determine

To demonstrate:

The Venezuelan government has imposed a price ceiling on the retail price of a roasted coffee bean. The Accompanying diagram shows the market for coffee beans. In the absence of price controls, the equilibrium is at point E, with an equilibrium price of PE and an equilibrium quantity bought and sold of QE.

1. Consumer and producer surplus before price celling.
2. Consumer surplus after imposition of price celling.
3. Producer surplus after imposition of price celling.
4. The amount of producer surplus converting to consumer surplus after price celling.
5. The dead weight loss.

Concept Introduction:

Price Celling:

It is a government-imposed price control or limits on the maximum price that can be charged for a product. Government exercise such controls to protect consumers from economic situations where prices of commodities could be prohibitively high.

Consumer Surplus:

Consumer surplus is the difference between the maximum amount the consumer wants to pay for a good and the amount the consumer actually pays

Producer Surplus:

The producer surplus is the difference between the amount that a producer receives and the minimum amount the producer is willing to accept to part with the good. In other words, the producer surplus of a firm is the sum over all units produced of a difference between the market price and the marginal cost of production.

Deadweight Loss:

Deadweight loss is the loss of total surplus due to government intervention in the market mechanism It is the excess burden created due to loss of benefit to the consumers, producers or the government.