Effects of Government Regulation on Demand and Supply

A government can impose various restrictions that will lead to an imbalance in the quantity and price equilibrium resulting in a deadweight loss.

These interventions include:

  • Price ceilings and price floors
  • Taxes and trade restrictions
  • Minimum wages
  • Subsidies and Quotas

Price Ceilings

A price ceiling is the highest price at which it is legal to trade a particular good or service.

Assume that the demand and supply of housing determines the equilibrium rent of $550 a month and the equilibrium quantity of 4,000 units of housing.

The following graph shows the efficient housing market with maximum consumer and producer surplus.

Suppose the government imposes a rent ceiling of $400 per month which is below the equilibrium price. As a result the following changes happen.

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