Surplus, Price Controls, Taxes, Subsidies and Deadweight Loss

Surplus and efficiency

Consumer surplus is the area below the demand curve and above the price; producer surplus is the area above the supply curve and below the price. Their sum is total surplus, and in a competitive market with no externalities the free-market quantity maximises it. Any policy that moves quantity away from that point creates deadweight loss — the value of mutually beneficial trades that no longer happen.

Price controls

A price ceiling matters only if it is set below equilibrium: it creates a persistent shortage, non-price rationing, queues and quality decline. A price floor matters only if it is set above equilibrium: it creates a persistent surplus. A ceiling above equilibrium, or a floor below it, is non-binding and changes nothing.

Taxes, incidence and subsidies

A per-unit tax drives a wedge equal to the tax between the price buyers pay $P_b$ and the price sellers keep $P_s$. Statutory incidence does not determine economic incidence: the side that is relatively more inelastic bears the larger share, because it has fewer alternatives. A per-unit subsidy works in reverse — it pushes quantity above the efficient level and also creates deadweight loss.