and the new producer surplus is H + I. In effect, the price floor causes the area H to be transferred from

consumer to producer surplus, but also causes a deadweight loss of J + K.

This analysis shows that a price ceiling, like a law establishing rent controls, will transfer some producer

surplus to consumers—which helps to explain why consumers often favor them. Conversely, a price floor like a

guarantee that farmers will receive a certain price for their crops will transfer some consumer surplus to

producers, which explains why producers often favor them. However, both price floors and price ceilings block

some transactions that buyers and sellers would have been willing to make, and creates deadweight loss.

Removing such barriers, so that prices and quantities can adjust to their equilibrium level, will increase the

economy’s social surplus.

Demand and Supply as a Social Adjustment Mechanism
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