Question

Create your own diagram of any one of the four market interventions listed below.

Tax

Subsidy

Price Ceiling

Price Floor

Here's what I want your graph to show:

Original market equilibrium

The size of the tax or subsidy OR the level of the controlled price (depending on which intervention you choose)

The final market quantity

The area of deadweight loss (lost gains from trade) that results from this market intervention (shade it in and label it)

All other appropriate labels (D, S, P, Q, etc.)

Answer 1

The US government was so impressed with the Kungfu Panda movie that they decided everyone in the US must have a stuffed Panda bear. The below graph shows the market for Panda bears toys in the US.

In the graph shown above the market is initially at equilibrium at point "a" quantity is Q and the price in the market is P. So, the government decided to set a price ceiling. No seller will be able to sell goods above this price. The new price in the market is Pc.

At this price, the new demand is Q" which is much higher than the equilibrium quantity. But, at this price, the supply of stuffed panda bear will be much less only Q'. This will create a shortage of panda bear in the market and cause a deadweight loss. The deadweight loss area is shaded in the graph above.