What is the difference between a price floor and deadweight loss?

• A. A price floor causes a shortage.
• B. A price floor increases market efficiency.
• C. A price floor prevents the market from reaching equilibrium quantity and creates surplus; DWL arises due to misallocation.
• D. DWL decreases with price floor.

Answer: (C)

A price floor works as a minimum price set by the government. When it is set above the market-clearing price, the market cannot reach the equilibrium quantity because the higher price encourages more production than buyers want to purchase. This creates a surplus—more is produced than is bought. The actual trades occur at the floor price only up to the quantity demanded, leaving extra supply unsold. The key point is that this distortion prevents the market from reaching the efficient equilibrium quantity, and the total welfare falls relative to that equilibrium.

The deadweight loss comes from the fact that some mutually beneficial trades no longer occur due to the floor. Resources are misallocated: producers gain from the higher price on units that are sold, but buyers lose more on the units that aren’t purchased, and the overall surplus is reduced. That loss in total welfare is what we call deadweight loss.

So the statement captures both the creation of a surplus and the misallocation that generates deadweight loss. Shortages are not the outcome of a price floor (that happens with price ceilings), and price floors do not increase efficiency; they reduce it and increase deadweight loss.