Chapter 13: The Harberger Triangle
Yew-Kwang Ng Harberger triangles are areas of net losses in consumer surplus (on which see Chapter 12) and producer surplus used to measure the deadweight losses or welfare costs of such distortions as monopolies, price controls and taxes. Though the concept has a much longer history well before Harberger’s papers (1964a, 1964b), ‘Welfare triangles are “Harberger triangles” because Harberger’s papers measured them, did so in a consistent manner, and assisted and encouraged a host of others to do likewise’ (Hines 1999, p.185, which provides an excellent review of the history and issues involved with the triangle and on which parts of the following discussion are based). The textbook illustration of the triangle is shown in Figure 13.1.1 The initial equilibrium price P and quantity Q of a good is determined by the demand curve and supply curve S at the point A. The imposition of a per unit tax equal to the distance BD shifts the supply curve from S to S’, the quantity traded from Q to Q’, the price to the consumers/demanders to Pc and the net-of-tax price to the producers/suppliers to Pp. The tax revenue raised is measured by the area PcBDPp , being the per unit tax BD times the post-tax transaction OQ’. However, the loss in consumer surplus is measured by PcBAP, and the loss in producer surplus is measured by PADPp. The combined losses exceed the tax revenue by the Harberger triangle BAD. (The choice of the three alphabets is intentional to emphasize that the...
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