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