Figure 5-7 Market Inefficiency with Price Controls
Market Efficiency and Price Controls
At the beginning of this section we asked whether we could determine if
society as a whole is made better off or worse off as a result of the
government’s imposition of price floors or price ceilings. With an
understanding of economic surplus and market efficiency, we are now
ready to consider these questions.
Let’s begin with the case of a price floor, as shown in part (i) of Figure
7. The free-market equilibrium is shown by point E, with price and
quantity When the government imposes a price floor at the
quantity exchanged falls to In the free-market case, each of the units
of output between and generates some economic surplus. But
when the price floor is put in place, these units of the good are no longer
produced or consumed, and thus they no longer generate any economic
surplus. The purple shaded area is called the deadweight loss caused by
the binding price floor, and it represents the overall loss of economic
surplus to society. The size of the deadweight loss reflects the extent of
market inefficiency.
p 0
Q 0. p 1 ,
Q 1.
Q 0 Q 1