(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 346

CHAPTER 9 • The Analysis of Competitive Markets 321

who have stayed in the market but are producing less. Therefore, the total
change in producer surplus is −A − C. Producers clearly lose as a result of
price controls.
3. Deadweight Loss: Is the loss to producers from price controls offset by
the gain to consumers? No. As Figure 9.2 shows, price controls result in
a net loss of total surplus, which we call a deadweight loss. Recall that
the change in consumer surplus is A − B and that the change in producer
surplus is −A − C. The total change in surplus is therefore (A − B) ϩ
(−A − C) ϭ −B − C. We thus have a deadweight loss, which is given by the
two triangles B and C in Figure 9.2. This deadweight loss is an inefficiency
caused by price controls; the loss in producer surplus exceeds the gain in
consumer surplus.

• deadweight loss Net loss of
total (consumer plus producer)
surplus.

If politicians value consumer surplus more than producer surplus, this deadweight loss from price controls may not carry much political weight. However,
if the demand curve is very inelastic, price controls can result in a net loss of
consumer surplus, as Figure 9.3 shows. In that figure, triangle B, which measures
the loss to consumers who have been rationed out of the market, is larger than
rectangle A, which measures the gain to consumers able to buy the good. Here,
because consumers value the good highly, those who are rationed out suffer a
large loss.
The demand for gasoline is very inelastic in the short run (but much more
elastic in the long run). During the summer of 1979, gasoline shortages resulted
from oil price controls that prevented domestic gasoline prices from increasing to rising world levels. Consumers spent hours waiting in line to buy gasoline. This was a good example of price controls making consumers—the group
whom the policy was presumably intended to protect—worse off.

D

Price

S
B

C

Pmax

Q1

EFFECT OF PRICE CONTROLS WHEN
DEMAND IS INELASTIC
If demand is sufficiently inelastic, triangle B can
be larger than rectangle A. In this case, consumers suffer a net loss from price controls.

P0
A

F IGURE 9.3

Q2

Quantity