Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus a To determine the welfare effect of a governmental policy we can measure the gain or loss in consumer and producer surplus a Welfare Effects o Gains and losses caused b y government intervention in the market Chapter Slide 6
Chapter 9 Slide 6 ◼ To determine the welfare effect of a governmental policy we can measure the gain or loss in consumer and producer surplus. ◼ Welfare Effects ⚫ Gains and losses caused by government intervention in the market. Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus
Change in Consumer and Producer Surplus from Price Controls Suppose the government Price imposes a price ceiling Pmax which is below the ket-clearing price Po Deadweight Loss The gain to consumers is the difference between the rectangle A and the triangle B B 0 A The loss to producers is the sum of rectangle max T A and triangle C. Triangle B and c together measure the deadweight loss. Q Q hapter Quantity Slide 7
Chapter 9 Slide 7 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 Change in Consumer and Producer Surplus from Price Controls Quantity Price S D P0 Q0 Pmax Q1 Q2 Suppose the government imposes a price ceiling Pmax which is below the market-clearing price P0
Change in Consumer and Producer Surplus from Price Controls ■○ bservations The total loss is equal to area b+ c o The total change in surplus (A-B)+(-A-C)=-B-C o The deadweight loss is the inefficiency of the price controls or the loss of the producer surplus exceeds the gain from consumer surplus Chapter Slide 8
Chapter 9 Slide 8 ◼ Observations: ⚫ The total loss is equal to area B + C. ⚫ The total change in surplus = (A - B) + (-A - C) = -B - C ⚫ The deadweight loss is the inefficiency of the price controls or the loss of the producer surplus exceeds the gain from consumer surplus. Change in Consumer and Producer Surplus from Price Controls
Change in Consumer and Producer Surplus from Price Controls ○ bservation Consumers can experience a net loss in consumer surplus when the demand is sufficiently inelastic Chapter Slide 9
Chapter 9 Slide 9 ◼ Observation ⚫ Consumers can experience a net loss in consumer surplus when the demand is sufficiently inelastic Change in Consumer and Producer Surplus from Price Controls
Effect of Price Controls When demand is inelastic If demand is sufficiently inelastic, triangle b ca Price D be larger than rectangle A and the consumer suffers a net loss from price controls. Example max Oil price controls and gasoline shortages n1979 Q Q Quantity Chapter Slide 10
Chapter 9 Slide 10 B A Pmax C Q1 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 Effect of Price Controls When Demand Is Inelastic Quantity Price P0 Q2