Reference no: EM132401055

A deadweight loss represents wealth that was never created. It is a concept that can be difficult to observe in real life. When transactions don't take place, consumers and producers don't receive the benefits of those transactions. Regardless, in economics, those benefits are wealth that could have been used for something else. Estimating the value of the deadweight loss that results from inefficient markets or government policies helps us put a number on the potential benefits we could have had if the market was corrected.

Consider the market for kidneys. In the United States, it is illegal to buy or sell a kidney, but you can donate one. This effectively makes the price of kidneys zero (a price ceiling). The result? Approximately 4,500 people die every year while waiting for someone to donate a kidney to them. (Asarta, 2016, p.153) The zero price means many people never think of donating a kidney unless one of their loved ones is in need of it (and often they are not a match).

In economic terms, the price of zero for a kidney means the quantity of kidneys supplied is less than the quantity of kidneys demanded by patients who need a new kidney. These people would likely be willing to pay hundreds of thousands of dollars to have a few extra decades of life with their families. These decades of happiness with loved ones are tangible, real benefits that would go to people who otherwise might die. Legalizing kidney sales is wrought with its own unintended consequences, but it's important to at least understand that the current policy of a zero price has its own real costs too: the deadweight loss of too few kidney transplants and, as a result, too many deaths. 

• Why is there a government regulated price ceiling of zero for kidney transplants?
• What effect does this have on supply and demand?
• How does this affect "market efficiency"?
• What is the deadweight loss of such a price ceiling?
•  (What is the opportunity cost involved)?
• Consider those who couldn't afford to pay the "fair-market price" for a new kidney. Is market efficiency the only thing governments and people should care about?
• What is your opinion about this type of regulation regarding price ceilings and floors?