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Before 1980, the airline industry in the U.S. was regulated by Civil Aeronautics Board (CAB). Fares were set well above the free market prices.
If the industry were unregulated, market equilibrium price and quantity would be (PE, QE). Under the regulated airfare, Quantity demanded = Q1, Quantities airline is willing to supply is Q2, where Q1 < QE and Q2 > QE
1) If airline supplied Q1, what would be consumer's gain or loss? producer's gain or loss? Change in total social welfare? Illustrate with a graph.
2) If airline supplied Q2, what would be consumer's gain or loss? producer's gain or loss? Change in total social welfare? Illustrate with a graph
3) If airline supplied Q3 where Q1< Q3 < Q2, what would be consumer's gain or loss? producer's gain or loss? Change in total social welfare? Illustrate with a graph.
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