Let’s count the value of lost gains from trade in a regulated market. The government decides it wants to make basic bicycles more affordable, so it passes a law requiring that all one-speed bicycles sell for $30, well below the market price. Use the data below to calculate the lost gains from trade, just as in Figure 8.3. Supply and demand are straight lines. ki4

a. What is the total value of wasted time in the price-controlled market?

b. What is the value of the lost gains from trade?

c. Note that we haven’t given you the original market price of simple bicycles—why don’t you need to know it? (Hint: The answer is a mix of geometry and economics.)

Transcribed Image Text:

Price of bicycles Supply $80 30 Demand 100 200 Quantity of bicycles