9. Competitive Markets

Price is set where supply meets demand, and a tax wedged between them evaporates welfare exactly equal to the Harberger triangle.

• Supply, Demand, and Equilibrium — The competitive equilibrium is where the demand and supply curves cross. That crossing fixes both price and quantity at once. Now add a per-unit tax and a wedge opens up. The price buyers pay pulls apart from the price sellers receive. Fewer trades happen, and the lost trades destroy welfare. That destroyed part is the deadweight loss in the formula below. What remains splits into consumer surplus, producer surplus, and tax revenue. For example, say a 🍬 candy sells for 100 won at the corner 🏪 shop. A tax of 20 won per candy makes shoppers pay 110 won while the shop keeps only 90. The 20 won in the middle is the wedge. Pricier candy means fewer friends buy it.
• Tax vs Quota: Deadweight Loss — A tax and a quota are different policy tools. Yet both shrink the amount traded. Switch the tool and the lost welfare keeps the same shape. The deadweight-loss triangle holds its area either way. Only the destination of the transfer changes. With a tax it becomes government revenue. With a quota it becomes rent for whoever holds the quota. For example, say the corner 🏪 shop sells 10 🍬 candies a day. The government caps sales at 6 a day, so 4 trades vanish. Some friends who wanted candy cannot buy it. That frustration over vanished trades is the deadweight loss. The shop holding the selling permit pockets the rent instead.