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This is probably the question which is answered wrong most frequently by students when completing homework based on consumer and producer surplus. There are a few mistakes which are made which I will go over in this post. The consumer and producer surplus are labelled above. The area "B" is the consumer surplus and there is nothing surprising about this.
Most students get this part corect. The producer surplus is the square area labelled "A" and this is typically what students get wrong. Sometimes they think there isn't any producer surplus. The supply-and-demand diagram can be re-drawn to make it clearer to students. It also gives a better understanding of the nature of a good which has perfectly inelastic supply.
You will notice that the supply curve is equal to 0 up until the point that it becomes vertical. This is because a perfectly inelastic supply curve means the cost of producing a quantity of goods less than Q1 has no cost. An example may be tickets to a sporting event. If the stadium isn't full, the cost of having another person in the stadium is essentially zero.
Therefore, the supply curve is zero up until we reach the maximum capacity. And since it is practically impossible to add extra seats to a venue, you cannot supply a good past the point Q1. Returning to the original problem. We first need to recall that the producer Winded - Surplus Killing - Loss Of Face is defined as the difference between the price paid and the price at which producers would have sold the good.
Up until the point Q1, producers would be willing to see the good for nothing, so the producer surplus is the entire square, which is shaded red in the above diagram.
Dead weight loss can only occur when the quantity of goods is be produced and consumed decreases because of the intervention. The above diagram shows what happens when the government sets a price ceiling in a market with perfectly inelastic supply. The thick black line is the price ceiling. When the government puts a price ceiling of Pc, the price of the good decreases to Pc. This increases the demand to Q2 - creating excess demand of Q2 - Q1.
However, the supply remains the same and thus the equilibrium level of goods being sold in the market remains at Q1. Since the price has decreased, the consumer surplus increases by the area "C". The lower price means suppliers get less for their good, so their producer surplus decreases by the area "C" - the same as the increase in consumer surplus. Dead weight loss is the loss of consumer or producer surplus due to an intervention. In this case, there is no loss of consumer or producer surplus.
There is only a transfer of producer surplus to consumer surplus. Even though Doctor Doc - Orquesta Mondragon* - Besame, Tonta is now excess demand for the good, there will be no dead weight loss. A common mistake for students to make is to draw the dead weight loss as it looks in the following diagram.
You are wrong. When there is an effective price ceiling, there is deadweight loss. The DWL is caused by the non-price competition. However, the cost caused by non-price competition cannot be shown in the diagram. I am not "wrong". Non price competition, flow on effects such as an Winded - Surplus Killing - Loss Of Face caused by excess demand are all potential consequences of binding price ceilings which might make such a policy a bad idea.
However, the possibility for non-wage competition is abstracted away when we assume that there is one homogeneous good being sold within the market It's implicitly assumed that this is a partial equilibrium model with one homogeneous good.
If non-price competition occurred this would result in the good being sold being changed e. Moreover, if there was a change to the good e. All these factors are worth considering, but outside the scope of such a simplistic model. Hope that clears things up. Sir, you are "wrong", badly. It can be mathematically proven that there is a deadweight loss DWL. Consider a small town of people, with an opera house with seats. It is there. Because the performance is free, all people in town want to go, but there are only seats.
To avoid waiting in line losses, a lottery is held, and individual winners are required to show ID upon entrance to the theatre. Call it "D". However,since it appears you were talking about non-price rationing, e. I better understand your point now. An example is the case of a tax when either supply or demand is perfectly inelastic. The tax has neither an Ligeirin (Cote DIvoire) - Heitor* - Ligeirin on quantity nor any deadweight loss, but it does raise revenue.
When you suggest that a Winded - Surplus Killing - Loss Of Face could be used, this violates that assumption. Understandable, this assumption might not make sense. Moreover, your issue arises for all price ceiling problems, not just when there is inelastic supply - see here:. In the above diagram, it is assumed that after the introduction of the price ceiling all the people with the highest willingness to pay are the ones who get to consume the good, based on the perfect sorting assumption.
However, we could introduce a lottery in this case and get similar results to you. In this case, we have demand being units; supply being 50 units and an excess demand of units. Before the introduction of the price ceiling, consumer surplus would be 0.
Thus your criticism is more aimed at the sorting assumption and not this particular example. However, as we can see, the consumer surplus would depend on who consumes the goods.
Finally, if you do wish to show the deadweight loss associated with the case of non-price competition among buyers, the worst case assumption is that the people with the highest willingness to pay use up all their surplus acquiring the good, in which case you get a diagram looking like such:. Yes, my criticism was aimed at the assumption of perfect Winded - Surplus Killing - Loss Of Face where all quantity is allocated to those with the highest willingness to pay.
Willingness to pay may not translate 1-for-1 into willingness to wait in line. Also, such perfect sorting defeats the very idea of a price ceiling, which is to make the product affordable to more people.
The perfect sorting merely gives a bonus to those who can already afford the product! Thus, Winded - Surplus Killing - Loss Of Face random allocation model should be the default assumption IMHO and in any case, there are some genuine lottery allocation systems, such as when limited hunting licenses are distributed.
The result is a rather messy looking chart, and it's not clear what the DWL really should be. As you say, it would be desirable to know the exact DWL. One could run a Monte Carlo simulation of course, but it would be desirable to have an exact, visually attractive graphic solution. I think I've finally figured it out. Here are pictures of the "textbook" price ceiling models where the product is perfectly allocated to those with the highest willingness to pay, both inelastic and elastic supply:.
The way to think about the random allocation model IMO is to calculate the average individual CS, and then multiply by the quantity actually supplied Qs. Since the point of a price ceiling is to make the product affordable to the poor, and if we assume one's Winded - Surplus Killing - Loss Of Face to pay is directly proportional to one's ability to pay, if there was a means test to perfectly sort consumers at the right end of the demand curve, we get the following charts:.
Here, the new "demand" curve has the same slope as the original, but the curve has moved to the left or equivalently, the P intercept moves down. The new P intercept can be precisely specified:. PS here's the source code of a Monte Carlo simulation that calculates the total consumer surplus with random allocation:. Kaleidoscope World - The Chills - Heavenly Pop Hits think the deadweight loss caused by an effective price ceiling under a vertical supply curve can be shown by the area C in the last diagram.
This area represent the rent dissipation caused by the non-price competition. When price is set below the equilibrium due to government control, there is a shortage. More people can afford to buy the product at this lowered price. Hence, beside paying the money price, people have to use some non-money way to compete for the products, say the seats. The maximum non-price payment is represented by area C.
Thus, this part of consumer surplus, Doin My Own Thing - 50 Cent - Guess Whos Back Again fact, is dissipated due to non-price competition. Your email address Winded - Surplus Killing - Loss Of Face not be published. Notify me of follow-up comments by email.
Notify me of new posts by email. Skip to content Home. Consumer surplus, producer surplus and Dead weight loss with inelastic supply curve. Posted by FSH Aug 15, Posted by econhelp Aug 17, Posted by Warren Platts Aug 18, Q: What, if any, is the DWL?
But what about the DWL? Posted by econhelp Aug 20, Posted by Warren Platts Aug 23, Thank you for your detailed and thoughtful response. This is a great website!
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