Question

Which of the following will occur if the government institutes an effective price ceiling on bottled drinks?

Answer 1

The question asks which of the following, but there are no choices. I don't know if it is supposed to be answered in context to a specific situation, so I'll just explain what happens with price ceilings in general.

Assuming the government sets the ceiling below the equilibrium price (where supply and demand cross), demand will be higher while supply will be lower. This is due to the fact that consumers want to buy more since the drinks are cheaper, and producers want to produce fewer bottles since they are not making as much money. This creates a shortage.

The new quantity supplied will be where the supply curve crosses the horizontal price ceiling line, and the new quantity demanded will be where the demand curve crosses the price ceiling.

If we were to draw the graph of supply and demand, the area to the left of the equilibrium point and between the supply and demand curves represents total surplus. The area above the equilibrium price (NOT the price ceiling) and below demand is consumer surplus because there is extra value that consumers are willing to pay, however they don't have to because the price is lower. The area below the equilibrium price and above supply is producer surplus because The price is higher than the minimum value the producer has for the product.

That being said, with a price ceiling in place, the new price is lower and the quantity supplied is less. That means that there is less total surplus. This results in deadweight loss.