Department

Economics

Document Type

Article

Publication Date

2010

Abstract

In most introductory and intermediate microeconomics textbooks, the measurable welfare effects of price controls, quantitative restrictions, and market restrictions more generally, are depicted as a Harberger triangle. This depiction understates these restrictions’ inefficiency costs because it captures only the ‘‘top-down’’ distortion caused by the wedge these restrictions drive between market-wide quantity demanded and quantity supplied. It ignores the ‘‘bottom-up’’ distortions caused by allocative inefficiencies on the constrained side of the market. In this article we describe a simple graphical exposition of these bottom-up distortions. We argue that this graph can provide students with a picture of both the top-down and bottom-up inefficiencies. Moreover, it can be used for simple back-of-the-envelope estimates of the magnitudes of the two inefficiencies.

Citation

David Colander, Sieuwerd Gaastra, and Casey Rothschild (2010). The Welfare Costs of Market Restrictions. Southern Economic Journal 77(1), 213-223.

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Economics Commons

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