The Waste Caused by price Controls 2.00 s Price Ceiling set at $1.00 1.80 Consumer surplus $900/day 1.60 Lost economic 140 surplus =$800/day 1.20 a1.00 Producer surplus D $100d With price controls Producer surplus (1/2)(1,000)(20)=$100/ day or a loss of $800/day Economic surplus= $1, 000or a loss of $800/day 12345 Quantity(1, 000s of gallons/day) Chapter 7: Efficiency and Exchange Slide 16
MB MC Chapter 7: Efficiency and Exchange Slide 16 Producer surplus = $100/day Lost economic surplus = $800/day Consumer surplus = $900/day The Waste Caused by Price Controls 2.00 Quantity (1,000s of gallons/day) D S 1 2 3 4 5 1.60 1.20 1.00 .80 1.80 1.40 8 Price ($/gallon) With price controls: •Producer surplus = (1/2)(1,000)(.20) = $100/day or a loss of $800/day •Economic surplus = $1,000 or a loss of $800/day Price Ceiling set at $1.00
The Cost of Preventing Price Adjustments a The reduction in economic surplus from a price ceiling will be underestimated When The consumers who receive the product are not the consumers who value it the most o Consumers take costly actions to enhance their chances of being served Chapter 7: Efficiency and Exchange Slide 17
MB MC Chapter 7: Efficiency and Exchange Slide 17 The Cost of Preventing Price Adjustments ◼ The reduction in economic surplus from a price ceiling will be underestimated when ⚫ The consumers who receive the product are not the consumers who value it the most. ⚫ Consumers take costly actions to enhance their chances of being served
The Cost of Preventing Price Adjustments ■ Question What program could be used to help the poor get heating oil that would be more efficient than a price ceiling? Chapter 7: Efficiency and Exchange Slide 18
MB MC Chapter 7: Efficiency and Exchange Slide 18 The Cost of Preventing Price Adjustments ◼ Question ⚫ What program could be used to help the poor get heating oil that would be more efficient than a price ceiling?
When the Pie Is Largel Everyone Can Have a Bigger Slice Surplus with price controls Surplus with income transfers and no price controls R R With price controls set at $1.00 the Without price controls with income economic surplus is $1, 000/day transfers economic surplus is $1, 800/day R=economic surplus received by R&p have the same share and a rich people much larger economic surplus P= economic surplus received by poor people Chapter 7: Efficiency and Exchange Slide 19
MB MC Chapter 7: Efficiency and Exchange Slide 19 When the Pie Is Larger, Everyone Can Have a Bigger Slice R P R P Surplus with price controls Surplus with income transfers and no price controls With price controls set at $1.00 the economic surplus is $1,000/day *R = economic surplus received by rich people *P = economic surplus received by poor people Without price controls & with income transfers economic surplus is $1,800/day *R & P have the same share and a much larger economic surplus
The Cost of Preventing Price Adjustments ■ Question What would be a potential cost of income transfers? Chapter 7: Efficiency and Exchange Slide 20
MB MC Chapter 7: Efficiency and Exchange Slide 20 The Cost of Preventing Price Adjustments ◼ Question ⚫ What would be a potential cost of income transfers?