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Targeted Teaching: The Welfare Costs of Market Restrictions

Author

Listed:
  • David Colander

    () (Middlebury College Department of Economics, Warner Hall, Middlebury, VT 05753, USA)

  • Sieuwerd Gaastra

    () (Middlebury College, Box 2877, Middlebury, VT 05753, USA)

  • Casey Rothschild

    () (Middlebury College Department of Economics, Warner Hall, Middlebury, VT 05753, USA)

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.

Suggested Citation

  • David Colander & Sieuwerd Gaastra & Casey Rothschild, 2010. "Targeted Teaching: The Welfare Costs of Market Restrictions," Southern Economic Journal, Southern Economic Association, vol. 77(1), pages 213-223, July.
  • Handle: RePEc:sej:ancoec:v:77:1:y:2010:p:213-223
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    File URL: http://dx.doi.org/10.4284/sej.2010.77.1.213
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    More about this item

    JEL classification:

    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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