Principles of Microeconomics / Unit 17 MIC 1639 review, 2 to 3 minutes
One Triangle, Six Wedges
The idea
Every deadweight loss in this course is the same triangle, differing only in what drives the wedge. The market is efficient where demand, the marginal benefit of a unit to its buyer, meets supply, its marginal cost to the seller. Any wedge that stops trade short of that point leaves units unmade that were worth more than they cost, and the sum of those gaps is the loss. A tax drives the wedge by law: buyers pay more than sellers keep, quantity falls, the government collects a rectangle on the units still traded, and the triangle is the rest. A price ceiling drives it by shortage: sellers supply less at the capped price, buyers would have paid more for the missing units, and the rectangle moves to the buyers who get the good. A price floor drives it by surplus, with the rectangle moving to sellers. A monopoly drives it by restriction: marginal revenue below price makes the firm stop where price still exceeds marginal cost, and the rectangle is its transfer from consumers. A tariff drives it twice, costlier production and lost consumption, with revenue between. And a negative externality drives it the other way: the market runs past the efficient point because the seller's cost leaves damage out, and the triangle sits on the units made that cost society more than they were worth. Rectangles are transfers, still in the economy; triangles are losses, gone. Efficiency counts the triangles; equity argues about the rectangles.
In practice
Worked example, one market three times. Demand is price equals one hundred minus quantity; supply is price equals twenty plus quantity; they meet at forty units and sixty dollars. A twenty-dollar tax: one hundred minus quantity equals forty plus quantity, thirty units, buyers pay seventy and sellers keep fifty; the triangle is half of twenty times ten, one hundred, and the revenue rectangle is six hundred. A ceiling at fifty: sellers offer thirty units, the thirtieth is worth seventy to a buyer and costs fifty: the same triangle, one hundred, with no revenue. A twenty-dollar external cost: social supply is forty plus quantity, the optimum is thirty, the market makes forty; the ten extra units cost society more than they are worth: the same triangle, one hundred, on the wrong side of the optimum.
Where people slip
Three cautions. The triangle's size depends on elasticity: the flatter the curves, the larger the quantity change for a given wedge and the larger the loss. Two wedges can cancel: a tax equal to an external cost is a wedge that removes a wedge, and its triangle is a gain, which is the whole logic of unit eleven. And the triangle measures lost surplus, not lost revenue or lost jobs; a policy can raise revenue or jobs and still carry one.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Builds on
Unlocks
- Nothing yet depends on this.
Something wrong in this lesson? Flag it