[MUSIC] We've seen that market equilibrium maximized total surplus and of this will be that if we deviate from the market equilibrium. We will be reducing the total surplus that's generated in the economy. So if the government intervenes in a competitive market in terms of trying to change the price or trying to change the quantity, there must be some negative consequence of this and I'd like to explore this in a couple of segments. So, one way a government might intervene in the market is by setting a price ceiling. In the market for bread, for example, which is the market that we are going to analyze here. It might be the case that the government decides that the equilibrium price is too high, that people can't afford to buy bread when the price is $4 and so the government might intervene and set what is known as a price ceiling. I denote this by p with a line on top showing that the price cannot exceed this price ceiling and for the sake of this example, let's say that it is a price ceiling of $3. A price ceiling of $3 means that no one can buy and no one can sell bread at a price that exceeds $3. Well, what will happen as a consequence in our market? At a price of $3, we can read off the demand curve what will be the quantity demanded. And we can see that the quantity demanded will be much larger than it was at a price of $4, because demand is downward sloping and a lower price encourages more consumers to go out there and look for a loaf of bread. On the other hand, at this low price of bread of $3, the quantity supplied is going to be much smaller than the equilibrium quantity. We can read off the supply curve what would be the quantity supplied and we find that it's down here. So in this case, we have excess demand or shortage. So we have excess demand for bread. Physically, this will look to us, if we were looking into this market as a long line of people outside stores. There'd be a lot of people looking for the bread that wasn't there, because suppliers could only be prepared to sell the smaller quantity. If the market was a competitive market, market forces would bring this price up and we would converge to the equilibrium price of four. But in this case, market forces aren't working, because the government is there enforcing this price ceiling. We assume in our models that the amount that's actually traded in the market is always the minimum of the quantity demanded and the quantity supplied. We are not going to force someone to sell when they don't want to sell. We're not going to force someone to buy when they don't want to buy. So the amount that's actually traded is the minimum of the two, it's going to be this quantity here. As a result, the units that are not traded are all these units here and these units are all units for which the marginal benefit exceeds the marginal cost. In other words, these are units that should be produced, because these are units that if they were produced would increase total surplus. By not producing these units, we are cutting off a little bit of the pie. Instead of total surplus being this whole big triangle here, it's now just this trapezoid and we've cut off this little bit of a triangle. We call this piece of total surplus that we've cut off and thrown away, we call this dead weight Loss, because this is lost to the total surplus that's generated in the economy and it's loss that's due to the government intervention. Again, the metaphor of the hill. If this equilibrium quantity is the top of the hill, it maximizes the total surplus. We've moved in this direction, which means we necessarily have moved down the hill. We've moved from the top downwards. We've got rid of some of the surplus. We'd left some of the surplus on the table, we've not generated these units. And by not generating them, we're creating dead weight loss.