C H A P T E R The Analysis of Competitive Markets CHAPTER OUTLINE 9.1 Evaluating the Gains and I n Chapter 2, we saw how supply and demand curves can help us describe and understand the behavior of competitive markets In Chapters to 8, we saw how these curves are derived and what determines their shapes Building on this foundation, we return to supply–demand analysis and show how it can be applied to a wide variety of economic problems—problems that might concern a consumer faced with a purchasing decision, a firm faced with a long-range planning problem, or a government agency that has to design a policy and evaluate its likely impact We begin by showing how consumer and producer surplus can be used to study the welfare effects of a government policy—in other words, who gains and who loses from the policy, and by how much We also use consumer and producer surplus to demonstrate the efficiency of a competitive market—why the equilibrium price and quantity in a competitive market maximizes the aggregate economic welfare of producers and consumers Then we apply supply–demand analysis to a variety of problems Because very few markets in the United States have been untouched by government interventions of one kind or another, most of the problems that we will study deal with the effects of such interventions Our objective is not simply to solve these problems, but to show you how to use the tools of economic analysis to deal with them and others like them on your own We hope that by working through the examples we provide, you will see how to calculate the response of markets to changing economic conditions or government policies and to evaluate the resulting gains and losses to consumers and producers Losses from Government Policies—Consumer and Producer Surplus 317 9.2 The Efficiency of a Competitive Market 323 9.3 Minimum Prices 328 9.4 Price Supports and Production Quotas 332 9.5 Import Quotas and Tariffs 340 9.6 The Impact of a Tax or Subsidy 345 LIST OF EXAMPLES 9.1 Price Controls and Natural Gas Shortages 322 9.2 The Market for Human Kidneys 325 9.3 Airline Regulation 330 9.1 Evaluating the Gains and Losses from Government Policies— Consumer and Producer Surplus 9.4 Supporting the Price of Wheat 335 9.5 Why Can’t I Find a Taxi? 338 9.6 The Sugar Quota We saw at the end of Chapter that a government-imposed price ceiling causes the quantity of a good demanded to rise (at the lower price, consumers want to buy more) and the quantity supplied to fall (producers are not willing to supply as much at the lower price) The result 342 9.7 A Tax on Gasoline 349 317