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Targeted Teaching: The Welfare Costs of Market Restrictions

Listed author(s):
  • 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)

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.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 77 (2010)
Issue (Month): 1 (July)
Pages: 213-223

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Handle: RePEc:sej:ancoec:v:77:1:y:2010:p:213-223
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