A deadweight loss resulting from the imposition of price Upper p1 is given by
The correct answer and explanation is:
The correct answer is that a deadweight loss resulting from the imposition of price p1p_1 is typically represented by the area of the triangle formed between the supply curve, the demand curve, and the price p1p_1.
In economics, deadweight loss refers to the loss of total welfare (or total surplus) that occurs when a market is not operating at its efficient equilibrium. This inefficiency can be caused by various factors, such as taxes, price floors, price ceilings, or monopolistic behavior.
To illustrate this, imagine a perfectly competitive market where the equilibrium price and quantity are PeP_e and QeQ_e, respectively. The deadweight loss occurs when a price p1p_1 is imposed that is either higher or lower than the equilibrium price. For instance, if a price ceiling is placed below the equilibrium price (say p1p_1), then the quantity demanded will exceed the quantity supplied, leading to a shortage. Alternatively, if a price floor is set above the equilibrium price (say p1p_1), there will be a surplus where the quantity supplied exceeds the quantity demanded.
In both cases, the market does not operate at the equilibrium point, and there are consumers who would have been willing to buy at the equilibrium price but are unable to due to the price restriction. Similarly, producers who would have been willing to supply at the equilibrium price are no longer willing to do so because the price is not high enough to cover their costs.
The deadweight loss triangle is formed between the price p1p_1, the supply curve, and the demand curve. The area of this triangle represents the lost total surplus, which could have been captured if the market had been allowed to reach its efficient equilibrium. This is a key concept in welfare economics, showing how certain interventions can lead to inefficiencies in the market.