Price controls can cause deadweight loss because they prevent the market from reaching equilibrium.

• A. They always increase efficiency.
• B. They have no effect on welfare.
• C. They can create deadweight loss by distorting prices and quantities.
• D. They always improve equity without any efficiency cost.

Answer: (C)

Price controls distort the price signals that guide buyers and sellers toward the efficient quantity. When a control is set below the equilibrium price, demand rises and supply cannot meet it, creating a shortage. Not all potential trades occur, so total welfare falls compared with a free market. If a control sits above the equilibrium, a surplus forms and some trades that would benefit both sides don’t happen, again reducing overall welfare. In either case, the quantity traded is not the market-clearing one, so total surplus is lower than it would be without the control, producing deadweight loss. The statement that price controls can create deadweight loss by distorting prices and quantities best captures this effect. The other statements misstate the typical impact, suggesting universal efficiency gains, no welfare change, or equity gains without costs, which doesn’t align with how price controls affect welfare.