This table repeats the buyer values and seller costs. In a market with no restri

Question

This table repeats the buyer values and seller costs. In a market with no restrictions on prices, the total gain captured by buyers and sellers will be $66, with $33 in gain for sellers and $33 in gain for buyers. (You can calculate these values by figuring out who trades at the equilibrium price and calculating how much gain each of them captures.) With a price ceiling of $8.50, fewer trades will take place. The total gain for buyers and sellers will be lower, although as you will see, it is uncertain exactly how much lower. These problems show you why the gain is uncertain. They also encourage you to think about the following question: Who wins and who loses when there is a price ceiling? If you were representing the interests of all buyers, would you be in favor of a price ceiling? Is the value that you calculated in the last question more or less than the total gain for buyers as a group when there is no price ceiling? In this case, for buyers as a group, the gain with the ceiling is less than the gain without a ceiling. In this case, for buyers as a group, the gain with the ceiling is greater than the gain without a ceiling.

Explanation / Answer

The gain without the ceiling is $33 (given in the question)
The gain with the ceiling is
-$8.50 (the cost of the item) * 8 (the number of buyers) = -$68,
You then add the value of the item for the first 8 buyers to get the new consumer surplus, which is
-$68 + $16 + $15.50 + $15 + $14 + $13.50 + $13 + $12.50 + $12 = $43.50

That is higher than $33, so the gain with the ceiling is greater than the gain without the ceiling.

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