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Ben's avatar

A great example of "deadweight loss" are restrictions on surge pricing for ride share companies. No surge pricing to get drivers on the road=no ride home from the ballgame for me.

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Matt Hagy's avatar

Great explanation of deadweight loss. I’d add the concepts of fixed costs vs. variable costs as a contributing factor to why suppliers decrease quantity with a price cap.

* Fixed costs: Costs a supplier pays regardless of quantity sold

* Variable costs: Cost per-a-unit of production

In the Popeyes example

* Fixed: Lease, maintenance, wages of a minimal crew

* Variable: Ingredients, wages of additional workers at busy times

With the price ceiling, Popeyes could find that sales after 10 PM doesn’t provide enough revenue to offset the costs of the minimum crew needed to operate a store. They could also find that some locations should be closed since they don’t bring in enough revenue to cover their fixed costs regardless of hours of operation.

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