(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 348

CHAPTER 9 • The Analysis of Competitive Markets 323

would be -B - C = -1.60 - 4.08 = -$5.68 billion. Note that most of
this deadweight loss is from triangle C, i.e., the loss to those consumers who
are unable to obtain natural gas as a result of the price controls.

20

P= $19.20
Supply

18
Demand
16

PG ($/mcf )

14
12
10
$7.73
8
B
6

C
PO = $6.40

4
2

A
QD = 29.1

QS = 20.6

Pmax = $3.00

0
0

10

20
Quantity (Tcf) Q* = 23

30

40

F IGURE 9.4

EFFECTS OF NATURAL GAS PRICE CONTROLS
The market-clearing price of natural gas was $6.40 per mcf, and the (hypothetical) maximum
allowable price is $3.00. A shortage of 29.1 - 20.6 = 8.5 Tcf results. The gain to consumers
is rectangle A minus triangle B, and the loss to producers is rectangle A plus triangle C. The
deadweight loss is the sum of triangles B plus C.

9.2 The Efficiency of a Competitive Market
To evaluate a market outcome, we often ask whether it achieves economic
efficiency—the maximization of aggregate consumer and producer surplus.

We just saw how price controls create a deadweight loss. The policy therefore
imposes an efficiency cost on the economy: Taken together, producer and consumer surplus are reduced by the amount of the deadweight loss. (Of course,
this does not mean that such a policy is bad; it may achieve other objectives that
policymakers and the public deem important.)
MARKET FAILURE One might think that if the only objective is to achieve
economic efficiency, a competitive market is better left alone. This is sometimes,

• economic efficiency
Maximization of aggregate
consumer and producer surplus.