Assume a profit-maximizing monopoly and firm in a perfectly competitive market have identical cost and revenue conditions. In which market will a binding price ceiling result in a more efficient outcome and why?

• A. The competitive market will be more efficient because it already allocates resources efficiently
• B. The monopoly will become more efficient because the deadweight loss will decrease
• C. Neither market is affected by a binding price ceiling
• D. Both markets become equally efficient under a binding price ceiling

Answer: (B)

Binding price controls change welfare differently depending on market structure. A monopoly typically sets a high price and restricts output, creating deadweight loss because some trades that would benefit both consumers and society don’t occur. If a binding price ceiling forces the price down, the monopolist must produce more, expanding quantity toward the socially efficient level. This reduces the deadweight loss and raises total welfare, even though some producer surplus is sacrificed.

In a perfectly competitive market, price equals marginal cost and the allocation is already efficient. A binding price ceiling below that efficient price disrupts the market, reduces quantity traded, and creates deadweight loss rather than improving welfare.

So the price ceiling improves efficiency more in the monopoly because it moves the outcome closer to the efficient quantity, whereas in a competitive market it creates inefficiency.