Question

Assume that the equilibrium price of Building Stone in West Bank is $20/m, and the

equilibrium quantity is 1000m. Suppose that the Government sets a maximum quantity

800m on the building stone market. How this policy would affect consumer surplus,

producer surplus, and total surplus. (Explain your answer by drawing a complete graph)

Answer 1

This policy will have an impact such that consumer surplus will be reduced because the maximum quantity is set below the equilibrium quantity and this will make prices to go up.

On the other hand, producer surplus will increase due to an increase in prices.