Considering the number of units actually being rented at the rent control price,
ID: 1119890 • Letter: C
Question
Considering the number of units actually being rented at the rent control price, what has happened to total consumer surplus and total producer surplus in this market compared to the situation where the equilibrium price prevailed? Compute your answers by providing before and after values for consumer, producer and total surpluses. What is the size (value) of the deadweight loss from rent controls? Derive all your answers algebraically. Remember that the deadweight loss is the difference between the total surplus before and total surplus after the ceiling is implemented. e.Explanation / Answer
Total Surplus = consumer surplus + producer surplus
CS = area above equilibrium price and below demand
PS = area below equilibrium price and above supply
CS = 0.5*(1200-750)*90
= 0.5*450*90
= 20250
PS =0.5*(750-300)*90
=20250
TS= CS+PS= 20250+20250=40500
After price ceiling
CS = area above ceiling price and below demand
PS = area below ceiling price and above supply
CS = 0.5*400*80+(100+80)= 24000
PS = 0.5*80*400 = 16000
TS = 24000+16000=40000
So Dwl = Total Surplus before ceiling – Total Surplus after ceiling
= 40500-40000 =500