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[Author Affiliation]David Colander, Middlebury College Department of Economics, Warner Hall, Middlebury, VT 05753, USA, colander@middlebury.edu; corresponding authorSieuwerd Gaastra, Middlebury College, Box 2877, Middlebury, VT 05753, USA, sgaastra@middlebury.eduCasey Rothschild, Middlebury College Department of Economics, Warner Hall, Middlebury, VT 05753, USA, crothsch@middlebury.edu[Acknowledgment]We are thankful to Ted Bergstrom and Laura Razzolini (the editor) for making important suggestions that improved the exposition in the article.1. IntroductionMany of the central ideas in economics are conveyed to students in graphs that provide a visual picture of economists' insights. One of the most well known of these pictures is the Harberger triangle, which is used to illustrate the deadweight loss from market restrictions such as monopoly power, quantity restrictions, and price ceilings and floors. Although it is generally known that the Harberger triangle misses important elements of these restrictions' inefficiency costs (see, for instance, Friedman and Stigler 1946; Glaeser and Luttmer 2003), this insight has not been integrated into economic textbooks. This is problematic because these overlooked inefficiency costs are theoretically important and in many cases are larger than the inefficiencies conveyed by the Harberger triangle.In this short article we show why the Harberger triangle significantly understates the efficiency costs of any restriction that does not inherently direct (or provide incentives for) agents to efficiently deal with it. We then provide a simple graphical method of capturing the additional deadweight loss in the form of a second triangle that can be seen as a measure of this additional deadweight loss. This graphical method should make it easier to integrate these insights into the textbooks and thereby help remedy the deficiencies of presentations based only on the Harberger triangle.1 We focus on the example of price controls but discuss how the analysis caries over to other restrictions such as quotas. We argue that, together, the second triangle and the Harberger triangle provide students with a much better picture of the costs of these market restrictions, a better sense of the relative magnitudes of the two types of deadweight loss, and a better segue into a discussion of the costs of market restrictions.The problem with using the Harberger triangle--the area between the demand and supply curve and between the pre- and post-control quantities--as a measure of the inefficiency resulting from, for example, a price floor is that it captures only one type of restriction-induced inefficiency: the inefficiency that arises because the market restriction prevents some mutually beneficial trades from taking place. Such inefficiencies might be called "top-down" inefficiencies because they would exist even if each side of the market consisted of a single representative agent reacting optimally to restrictions and dealing with the restriction in as efficient a manner as possible. When there are many agents affected by a price control, representative agent assumptions are inappropriate, and such controls will impose additional "bottom-up" costs on society. This bottom-up inefficiency occurs because, in addition to preventing mutual beneficial trades , price controls remove incentives for the right trades to take place. They therefore impose wrong -trade , bottom-up, social costs: They lead some of the wrong agents to do the supplying or demanding. A price floor, for example, both causes an inefficiently low quantity of the good to be supplied and fails to incentivize the lowest-cost potential suppliers to do that supplying. For example, faced with a minimum wage restriction, jobs will have to be rationed, but McDonald's and other minimum wage employers will have no incentive to ration those jobs in the most efficient manner--for example, to those who benefit the most from receiving them. …

1. IntroductionThe effect of a legal minimum wage on employee turnover is an important consideration when evaluating the effectiveness of a minimum wage policy. If an increase in the minimum wage results in greater turnover, then firms' hiring costs are increased, and the direct benefit to workers who are paid the minimum wage may be lessened. A reduction in turnover, on the other hand, would mean more stability for employers and workers, though access to minimum wage jobs may be reduced for job seekers. Despite the recent proliferation of studies on the effects of legal minimum wages, their impact on turnover has received relatively little attention from economists. This may be due to the fact that much of the literature focuses on the "teen labor market" where there is more churning than in the "adult labor market" (Gardecki and Neumark 1998). The fact remains, however, that a significant proportion of workers hired at the minimum wage are adults, and the effects of the minimum wage onthe turnover hazard are understudied.1Standard economic theory suggests that a price floor such as a minimum wage results in fewer transactions and in rents for those suppliers who manage to sell. In the context of the labor market, this means workers in minimum wage jobs may be expected to receive rents and, therefore, may be less likely to quit. Another possible consequence of a minimum wage arises from imperfect information in the labor market combined with heterogeneity among workers and jobs. Prior to the start of an employment relationship, the worker does not know all the relevant aspects of the job and the employer does not know all the important characteristics of the worker. As a result, in the absence of a mandated minimum wage, job applicants may use wage offers to infer information about the nonpecuniary aspects of jobs, thereby facilitating the matching process. A binding minimum wage compresses the wage distribution so that a single wage is associated with a larger array of jobs. This means that the wage offer becomes a poor indicator of a job's nonwage characteristics, which leads to a higher proportion of poor matches and, consequently, more turnover.This paper uses data on young men and women in the 1988-1994 rounds of the National Longitudinal Survey of Youth (NLSY) to estimate the relationship between the minimum wage and the turnover hazard. The extent to which the minimum wage binds varies across states both because of differences in state laws and because of differences in wage levels across states. We exploit this variation to estimate turnover hazards as a function of the ratio of the nominal minimum wage to the state median wage. This variable measures the extent to which the minimum wage binds.We find some evidence that in states where the minimum wage is low relative to the state's median wage, men hired at the minimum wage have lower employee-initiated separation hazards than other low-wage workers. As the minimum wage rises relative to the prevailing median wage-that is, as the minimum wage becomes more binding-men hired at the minimum wage are increasingly likely to leave their jobs at any given duration. When the minimum wage is high relative to the median wage we find that men hired at the minimum wage have significantly higher employee-initiated separation hazards than other low-wage workers. We interpret these findings as evidence that while rents may accrue to minimum wage workers, the job matching process is undermined when the minimum wage binds. Our results apply to the men in our sample, but not to the women. Indeed, for women we find no connection between employment duration and the starting wage rate, though we do uncover some evidence that for women in low-wage jobs, employment duration is more elastic with respect to the presence of family-friendly fringe benefits than it is for men.The paper proceeds as follows. The next section explores the possible reasons minimum wages would affect turnover and discusses the existing empirical and theoretical research on this topic. …

Observing OPEC`s short-term price-output ceiling behavior during the late 1980s and 1990s, one can conclude that it attempts to stabilize the market price within a range of its announced target price by controlling the output ceiling. If the price moves within four to five dollars below the target price, it usually reduces the output ceiling and assigns new quotas to its member countries to keep the price close to the target price. In reality, OPEC established a band for the market price positioned round the target price by basically choosing suitable upper and lower limits for the output or, at least in soft markets, it places tolerance zone below the target price in order to restrict the discrepancy between the market price and the target price. The lower limit is particularly needed because it sets a price floor and ensures that the market price stays above the significantly lower marginal cost of oil production. If the limits of these zones are backed by a perfectly credible intervention policy, they can generate an expectations process that should turn the market prices around even before any intervention takes place. While OPEC in some sense observes the target zones for its prices, thosemore » zones are neither well defined nor vigorously defended. It can not always or may not be willing to maintain the price within the limits of the desired zone by cutting the output ceiling; it must sometimes readjust the target price and output ceiling, and thus create a new target zone to reflect the market`s new fundamentals. This is particularly true now because OPEC is losing market share to the other oil producers and is contemplating to shift the current band. Actual readjustments in the target price can be so large, as in 1980 and 1985, that the newmarket price must jump as well. They can occur when both the market price is near the limits of the band as well as when it is inside the band but still further away from those limits.« less

Since Telser [9], economists have come to recognize pro-competitive motivations for a manufacturer's decision to impose resale price maintenance (RPM), used as a price floor, on his retail network. Until then, retailer and manufacturer cartel explanations had dominated the profession's understanding of the phenomenon. This is despite the fact that these scholars knew that for the most part the retail sector was and remains subject to free entry conditions, and that retailers also have strong incentives to carry the products of non-colluding manufacturers since the practice has rarely been universal in its product coverage. Telser's logic is relatively straightforward. When court-enforceable contracts for retailer provision of costly information, promotion or demonstration of the manufacturer's product to consumers at the point of sale is infeasible; when a separate payment for these "special services," made by either the consumer or the manufacturer, is also impractical; RPM can often be the least costly way to enforce their supply. These services are special because they are idiosyncratically fashioned to consumer preferences, where national or local advertising by mass media would be an ineffective substitute. They are also strictly devoted to the manufacturer's product and cannot be diverted to other retail goods. Given that the retail price floor established by RPM affords an attractive margin over the wholesale price, thereby enabling retailers to recoup the costs associated with the added resources required in their undertaking, an optimal amount of the special services will be forthcoming. Recourse to a coercive pricing restraint is predicated on the existence of retailers who do not provide the special services but reap the profits generated from sales made to consumers who were informed by rivals. These purchases would be diverted from the informing retailer to the "freeriding" retailer because of the latter's relatively low price offering, which is made possible only through avoiding the costs of providing the special services. Klein and Murphy [6, 266], on the other hand, claim that this free-rider model is not entirely thought through. They suggest that RPM cannot prevent free riding when there are alternative margins on which to compete. Accessory goods and services can be provided at no extra cost to