Iraq 2003: Gas prices are frozen at $.05 per gallon
Bill Gibson
University of Vermont
Deadweight Loss
Price ceilings Price ceilings that involve a maximum price below the market price create five important effects.
Bill Gibson
University of Vermont
Deadweight Loss
Price ceilings Price ceilings that involve a maximum price below the market price create five important effects. Shortages
Bill Gibson
University of Vermont
Deadweight Loss
Price ceilings Price ceilings that involve a maximum price below the market price create five important effects. Shortages Reduction in Product Quality
Bill Gibson
University of Vermont
Deadweight Loss
Price ceilings Price ceilings that involve a maximum price below the market price create five important effects. Shortages Reduction in Product Quality Wasteful Lines and Other Costs of Search
Bill Gibson
University of Vermont
Deadweight Loss
Price ceilings Price ceilings that involve a maximum price below the market price create five important effects. Shortages Reduction in Product Quality Wasteful Lines and Other Costs of Search Loss of Gains from Trade
Bill Gibson
University of Vermont
Deadweight Loss
Price ceilings Price ceilings that involve a maximum price below the market price create five important effects. Shortages Reduction in Product Quality Wasteful Lines and Other Costs of Search Loss of Gains from Trade Misallocation of Resources
Bill Gibson
University of Vermont
Deadweight Loss
Price ceilings Price ceilings that involve a maximum price below the market price create five important effects. Shortages Reduction in Product Quality Wasteful Lines and Other Costs of Search Loss of Gains from Trade Misallocation of Resources Example Is there anything good about price controls?
Bill Gibson
University of Vermont
Deadweight Loss
Price ceilings Price ceilings that involve a maximum price below the market price create five important effects. Shortages Reduction in Product Quality Wasteful Lines and Other Costs of Search Loss of Gains from Trade Misallocation of Resources Example Is there anything good about price controls? Answer: Not really....
Bill Gibson
University of Vermont
Deadweight Loss
Why do you think farmers killed a million baby chickens in 1973?
Producer Surplus Shrinks to this Willingness to Pay
Market Price
Supply
Consumer surplus Producer Surplus
Controlled Price
Shortage Demand Quantity Qs
Qmarket
Qd 16
Bill Gibson
University of Vermont
Deadweight Loss
Deadweight loss Deadweight loss
Price = Lost Consumer Surplus+ Lost Producer Surplus Supply
Willingness to Pay
Market Price
Total Value of Wasted Time
Lost Consumer Surplus Lost Producer Surplus
Shortage Controlled Price
Demand Quantity Qs Bill Gibson
Qd University of Vermont
17
Deadweight Loss
Waste when there are price controls
Bill Gibson
University of Vermont
Deadweight Loss
Waste when there are price Surplusfloors Deadweight losses
Price = Lost Consumer Surplus+ Lost Producer Surplus Supply Controlled Price
Market Price
Surplus Lost Consumer Surplus Lost Producer Surplus
WTS
Demand Qd
Qmarket
Qs
Quantity 23
Bill Gibson
University of Vermont
Deadweight Loss
Waste when there are price floors Price controls that create surpluses lead to wasteful increases in quality.
Supply
Price Deadweight Loss Controlled Price (Floor) “Quality” Waste
Willingness to Sell
Demand
Quantity
QD at the Controlled Price 24
Bill Gibson
University of Vermont
Deadweight Loss
The shortage in the figure is caused by
1
Price Ceilings Create Shortages
Price
Excess demand at the price shown.
Supply
Market Equilibrium Shortage
Controlled Price (Ceiling)
Demand Quantity Qsupplied
Qdemanded 7
Bill Gibson
University of Vermont
Deadweight Loss
The shortage in the figure is caused by
Price Ceilings Create Shortages
Price
Supply
1
Excess demand at the price shown.
2
The MB at the quantity shown exceeds the MC.
Market Equilibrium Shortage
Controlled Price (Ceiling)
Demand Quantity Qsupplied
Qdemanded 7
Bill Gibson
University of Vermont
Deadweight Loss
The shortage in the figure is caused by
Price Ceilings Create Shortages
Price
Supply
Market Equilibrium Shortage
Controlled Price (Ceiling)
1
Excess demand at the price shown.
2
The MB at the quantity shown exceeds the MC.
3
The fact that the price is out of equilibrium.
Demand Quantity Qsupplied
Qdemanded 7
Bill Gibson
University of Vermont
Deadweight Loss
The shortage in the figure is caused by
Price Ceilings Create Shortages
Price
Supply
Market Equilibrium
1
Excess demand at the price shown.
2
The MB at the quantity shown exceeds the MC.
3
The fact that the price is out of equilibrium.
4
All of the above.
Shortage
Controlled Price (Ceiling)
Demand Quantity Qsupplied
Qdemanded 7
Bill Gibson
University of Vermont
Deadweight Loss
The shortage in the figure is caused by
Price Ceilings Create Shortages
Price
Supply
Market Equilibrium
1
Excess demand at the price shown.
2
The MB at the quantity shown exceeds the MC.
3
The fact that the price is out of equilibrium.
4
All of the above.
Shortage
Controlled Price (Ceiling)
Demand Quantity Qsupplied
Qdemanded
Answer: All of the above 7
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price ceiling: 8
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price ceiling: 8 Supply at p = 8 is 3
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price ceiling: 8 Supply at p = 8 is 3 Willingness to pay is 16
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price ceiling: 8 Supply at p = 8 is 3 Willingness to pay is 16 DWL = 8
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price ceiling: 8 Supply at p = 8 is 3 Willingness to pay is 16 DWL = 8 Example What is value of lost time?
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price ceiling: 8 Supply at p = 8 is 3 Willingness to pay is 16 DWL = 8 Example What is value of lost time? Answer: 24
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price floor: 13
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price floor: 13 Demand at p = 13 is 4
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price floor: 13 Demand at p = 13 is 4 Willingness to supply is 8
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price floor: 13 Demand at p = 13 is 4 Willingness to supply is 8 DWL = 2
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price floor: 13 Demand at p = 13 is 4 Willingness to supply is 8 DWL = 2 Example What is quality waste?
Bill Gibson
University of Vermont
Deadweight Loss
Example
Demand 25 − 3q supply 5 + q so that Solution: 10 and 5 Price floor: 13 Demand at p = 13 is 4 Willingness to supply is 8 DWL = 2 Example What is quality waste? Answer: 16
