chapter_9

chapter_9 - Evaluating the Welfare Effects of Government...

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Producer Surplus Between 0 and Q 0 producers receive a net gain from selling each product-- producer surplus. Consumer Surplus Evaluating the Welfare Effects of Government Policy: CS & PS Quantity 0 Price S D 5 Q 0 Consumer C 10 7 Consumer B Consumer A Between 0 and Q 0 consumers A and B receive a net gain from buying the product-- consumer surplus
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Chapter 9 Slide 2 The loss to producers is the sum of rectangle A and triangle C. Triangle B and C together measure the deadweight loss. B A C The gain to consumers is the difference between the rectangle A and the triangle B . Deadweight Loss Price Ceilings and the Welfare Loss Quantity Price S D P 0 Q 0 P max Q 1 Q 2 Suppose the government imposes a price ceiling P max which is below the market-clearing price P 0 .
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Chapter 9 Slide 3 B A P max C Q 1 If demand is sufficiently inelastic, triangle B can be larger than rectangle A and the consumer suffers a net loss from price controls. Example Oil price controls and gasoline shortages in 1979 S D Price Ceiling: Demand Is Inelastic Quantity Price P 0 Q 2
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Chapter 9 Slide 4 B A 2.40 C The gain to consumers is rectangle A minus triangle B , and the loss to producers is rectangle A plus triangle C. S D 2.00 Quantity (Tcf) 0 Price ($/mcf) 5 10 15 20 25 30 18 Price Controls and Natural Gas Shortages
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Chapter 9 Slide 5 P 2 Q 3 A B C Q 2
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chapter_9 - Evaluating the Welfare Effects of Government...

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