ECO 108 Lecture Notes - Lecture 21: Deadweight Loss, Economic Surplus
3 Aug 2018
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Imagine we impose a rationing scheme on widgets. Say the equilibrium quantity of widgets is 500, but the government for some reason wants only 200 to be produced. In this case, the government may print 200 ration coupons. Whenever you buy a widget, you have to turn in a ration coupon, which is then destroyed. Once the coupons have all been used, no one can buy any more widgets. During world war ii, bananas, sugar, and potatoes, among other things, were rationed. What happens next depends quite a bit on exactly how the government distributes the coupons and what people are willing to do with them. Social gain without rationing is a+b +c +d +e +f. Rationing created a deadweight loss of c + e. it"s the same sort of deadweight loss you"d get from a tax, and for exactly the same reason.
