reducing consumer surplus.

Inefficiency of Price Floors and Price Ceilings

The imposition of a price floor or a price ceiling will prevent a market from adjusting to its equilibrium price

and quantity, and thus will create an inefficient outcome. However, there is an additional twist here. Along with

creating inefficiency, price floors and ceilings will also transfer some consumer surplus to producers, or some

producer surplus to consumers.

Imagine that several firms develop a promising but expensive new drug for treating back pain. If this therapy

is left to the market, the equilibrium price will be $600 per month and 20,000 people will use the drug, as

shown in Figure 3.24 (a). The original level of consumer surplus is T + U and producer surplus is V + W + X.

However, the government decides to impose a price ceiling of $400 to make the drug more affordable. At this

price ceiling, firms in the market now produce only 15,000.
76 3 • Demand and Supply
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