Harberger Model: Resource Allocation and Deadweight Loss

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Monopoly and Resource Allocation
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Introduction
According to Bouakez and Kano (2008), the Harberger model defines the mechanism on the
misallocation of resources and its effects on the market. The theory is also introspected in terms
of the taxation laws that are the corporate tax and the non-corporate taxes. One can use the
Harberger model in order to gauge the deadweight loss that takes place within the market.
Moreover, the model also specifies about the excess burden experienced by the market. As
opined by Chetty(2009), deadweight loss can be defines as the cost to the society that is caused
by the inefficient approach of the market for resource allocation. If the resources are abnormally
distributed in the market then it is obvious that the market will experience deadweight loss. The
following paper will demonstrate the effort made by Harberger in comparing the loss that take
place in the market place due to inappropriate distribution of resources. Moreover, the major
reason for deadweight loss is price control in the market by the government. The government
does not allow the free market to work in its own way and hence disturbs the invisible hand,
which further distorts the profit margin.
The deadweight loss helps the society to gauge the excess burden experienced by it. Moreover,
the concept of deadweight loss includes two major ideas they are consumer surplus and the
producer surplus. The consumer surplus is the benefits received by the consumers, which is
measured by the willingness of the customer to pay for the goods and services and the actual
amount he pays in the market. If the actual amount paid by the consumer is less than the desired
amount then the consumers experience surplus in the market transaction. On the other hand, the
producer surplus is measured by the difference between the desired quantities the producer wants
to supply against a desired amount of price. If the price received by the producer is greater than
the expectation corresponding to the supplied goods and services then the producer gains a
surplus in the market. Whenever, the resources are inappropriately allocated within the economy,
there occurs a welfare loss, which does not add on to the either consumer or producer surplus.
Therefore, Harberger carried on with his researches on gauging the deadweight loss experienced
by the US economy before the recession due to misallocation of the resources. In this process the
economist have made few assumptions based on which the theory is built for gauging the
deadweight loss.