CHAPTER • The Analysis of Competitive Markets 323 would be -B - C = -1.60 - 4.08 = -$5.68 billion Note that most of this deadweight loss is from triangle C, i.e., the loss to those consumers who are unable to obtain natural gas as a result of the price controls 20 P= $19.20 Supply 18 Demand 16 PG ($/mcf ) 14 12 10 $7.73 B C PO = $6.40 A QD = 29.1 QS = 20.6 Pmax = $3.00 0 10 20 Quantity (Tcf) Q* = 23 30 40 F IGURE 9.4 EFFECTS OF NATURAL GAS PRICE CONTROLS The market-clearing price of natural gas was $6.40 per mcf, and the (hypothetical) maximum allowable price is $3.00 A shortage of 29.1 - 20.6 = 8.5 Tcf results The gain to consumers is rectangle A minus triangle B, and the loss to producers is rectangle A plus triangle C The deadweight loss is the sum of triangles B plus C 9.2 The Efficiency of a Competitive Market To evaluate a market outcome, we often ask whether it achieves economic efficiency—the maximization of aggregate consumer and producer surplus We just saw how price controls create a deadweight loss The policy therefore imposes an efficiency cost on the economy: Taken together, producer and consumer surplus are reduced by the amount of the deadweight loss (Of course, this does not mean that such a policy is bad; it may achieve other objectives that policymakers and the public deem important.) MARKET FAILURE One might think that if the only objective is to achieve economic efficiency, a competitive market is better left alone This is sometimes, • economic efficiency Maximization of aggregate consumer and producer surplus