Answer to Question #139508 in Microeconomics for Sita

Question

Suppose the market for good X has an effective price floor. Then market demand suddenly falls. What impact does this have on the dead weight loss (social cost) caused by the price floor in the market, ceteris paribus?

Answer 1

When the market demand of good X suddenly falls,other factors held constant, the possible equilibrium price will increase due to low supply and high demand. This means that the dead weight loss which is social cost caused by the increase in price floor in the market will reduce. Dead weight loss here is the gauge of the lost economic efficiency when that socially optimal quantity of a good/service is not actually produced. (Lind, H. and Granqvist, R. ,2010).