Answer to Question #139040 in Macroeconomics for Avika Pal

Question

Suppose the market for good X has an effective price floor. Then market supply 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

If the market supply suddenly falls, then the possible equilibrium price will increase, and the dead weight loss (social cost) caused by the price floor in the market will decrease. Therefore, the dead weight loss will be smaller.