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Total Economic Surplus in a

unregulated market
Price
S

Bribery under price ceiling


P*

Ka-fu WONG
D
Quantity

Q*

Total Economic Surplus in a


unregulated market
P

Total Economic Surplus in a regulated market with


quantity equal to Q0
P
S

P*

D
Q

Q*

Deadweight loss
P

Q0

Price ceiling
P

Quantity demanded at price C = Q1


Quantity supplied at price C = Q0
Quantity transacted = Q1

Price ceiling

C
D
Q0

D
Q

Q0

Q1

Price ceiling

Price ceiling

Maximum Total Economic Surplus


IF: the higher value buyers get Q0, and the lower cost sellers sell Q0.
P

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.

Maximum bribe from the second highest value buyer.


S
Maximum bribe from the second
lowest value buyer.
Price ceiling

Q1

Price ceiling

C
Total amount
of bribes

D
Q0

If we consider a market of bribes, the market


equilibrium bribe will be D-C .
If everyone has to
pay a bribe of D-C
S
to get the good,
effectively everyone
is paying D. At D,
only Q0 is demanded.

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

Maximum amount of forgone wages from the


highest value buyer.

S
Maximum amount of forgone
wages from the second lowest
value buyer.

Price ceiling

D
Q0

Q1

Difference between bribery and waiting


time as an allocation mechanism

If everyone has the same wage rate, the market


equilibrium forgone wages will be D-C .
If everyone has to
forgone wages of DS
C to get the good,
effectively everyone
is paying D. At D,
only Q0 is demanded.
Price ceiling

C
Total
forgone
wages due
to waiting

D
Q0

Q1

If everyone has the


same wage, the
forgone wages will be
Q mapped into waiting
time.

Consumer surplus and producers


surplus under bribery or waiting

Bribery is a transfer of resources from the buyers to the


sellers, or from the buyers to the employees of the
sellers. Not much real resources is used up in the
process.
Waiting requires using time that could be used in
productive activities.
Thus, waiting is more wasteful.

Consumer surplus
P
S
D

Price ceiling

C
Total
forgone
wages due
to waiting

D
Q0

Q1
Producer surplus