Binding price floors and price ceilings in competitive markets lead to a
reduction in overall economic surplus and thus to market inefficiency.
In both parts of the figure, the free-market equilibrium is at point E with
price and quantity In part (i), the introduction of a price floor at
reduces quantity to In part (ii), the introduction of a price ceiling at
reduces quantity to In both parts, the shaded area shows the
reduction in overall economic surplus—the deadweight loss—created by
the price floor or ceiling. Both outcomes display market inefficiency.
The case of a price ceiling is shown in part (ii) of Figure 5-7. The free-
market equilibrium is again shown by point E, with price and quantity
When the government imposes a price ceiling at the quantity
exchanged falls to In the free-market case, each unit of output
between and generates some economic surplus. But when the price
ceiling is imposed, these units of the good are no longer produced or
consumed, and so they no longer generate any economic surplus. The
purple shaded area is the deadweight loss and represents the overall loss
of surplus to society caused by the policy. The size of the deadweight loss
reflects the extent of market inefficiency.
p 0 Q 0.
Q 1.
Q 2.
p 0
Q 0. p 2 ,
Q 2.
Q 0 Q 2