Figure 11.9: The Competitive Market Regulated By A Floor Price.What causes the deadweight loss? It is the loss due to the floor price making it noWhat is the easy way to restore the market to full efficiency?What if instead the regulator imposes a ceiling pricepc< pe, the market-clearingprice? How does this affect the total gains-from-trade? Look at Figure 11.10.
301Figure 11.10: The Competitive Market Regulated By A Ceiling Price.Therefore the Total Surplus generated by this regulated market is the areaNThis is smaller than the area ABC, which is the Total Surplus generated by themarket when it is unregulated. The ceiling price is causing the market to functioninefficiently. What causes the deadweight loss? It is as before – the regulation makesWhat is the easy way to restore the market to full efficiency?At what price level is the total gain from trade maximized?
302CHAPTER 11.MEASURING THE GAINS-FROM-TRADEcertain types of regulations for quite a lot of types of markets.)Notice that the welfare implications of the floor and ceiling price regulations arerather different. Reconsider Figure 11.9. In this example the floor price regulationimproves the gains received by the sellers.To see this, notice that the Producers’Surplus in the free market is the size of the area BCpe.Imposing the floor priceregulation increases the Producers’ Surplus to the size of the larger area BEDpf.Consumers, however, must suffer since their Total Surplus is reduced from the sizeof the area ACpeto the size of the smaller area ADpf. We already know that thetotal gain (surplus) from trade is reduced by imposing the floor price so the increasein the sellers’ surplus must be smaller than is the reduction in the buyers’ surplus.A floor price regulation always reduces the Consumers’ Surplus. The floor price can,but does not always, increase the Producers’ Surplus. Whether or not this happensdepends upon how high is the floor price. For example, imagine a floor price set sohigh that quantity demanded is zero. Then sellers sell nothing and so also lose as aresult of the regulation.