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unregulated market
Price
S
Ka-fu WONG
D
Quantity
Q*
P*
D
Q
Q*
Deadweight loss
P
Q0
Price ceiling
P
Price ceiling
C
D
Q0
D
Q
Q0
Q1
Price ceiling
Price ceiling
If the price cannot rise beyond C, only those units with cost lower than C will
be produced.
That is, only the lower cost sellers sell Q0.
S
P
S
Price ceiling
Q0
Price ceiling
D
Q
Q1
D
Q0
Price ceiling
Q1
Price ceiling
If the price cannot rise beyond C, buyers will want to buy a total of Q1.
How to allocate Q0 to satisfy the buyers?
If the price cannot rise beyond C, buyers will want to buy a total of Q1.
How to allocate Q0 to satisfy the buyers?
(1) Government helps allocate all the units to the highest value buyers who
are willing to buy.
(2) Government helps allocate all the units to the lowest value buyers who
are willing to buy.
P
S
S
+
Minimum Total
Economic Surplus
Price ceiling
Price ceiling
D
Q0
D
Q
Q1
Q0
Price ceiling
Q1
Price ceiling
If the price cannot rise beyond C, buyers will want to buy a total of Q1.
How to allocate Q0 to satisfy the buyers?
If the price cannot rise beyond C, buyers will want to buy a total of Q1.
How to allocate Q0 to satisfy the buyers?
(3) By bribery
(3) By bribery
Maximum bribe from the highest value buyer.
Q1
Price ceiling
C
Total amount
of bribes
D
Q0
D
Q0
Q1
Price ceiling
Price ceiling
If the price cannot rise beyond C, buyers will want to buy a total of Q1.
How to allocate Q0 to satisfy the buyers?
If the price cannot rise beyond C, buyers will want to buy a total of Q1.
How to allocate Q0 to satisfy the buyers?
(3) By waiting
(3) By waiting
S
Maximum amount of forgone
wages from the second lowest
value buyer.
Price ceiling
D
Q0
Q1
C
Total
forgone
wages due
to waiting
D
Q0
Q1
Consumer surplus
P
S
D
Price ceiling
C
Total
forgone
wages due
to waiting
D
Q0
Q1
Producer surplus