Harberger's triangle

Definition

Harberger's triangle refers to the deadweight loss occurring in the trade of a good or service due to government intervention, that takes the shape of a (curvilinear) triangle in the graph involving the demand curve and supply curve, where two sides of the triangle are usually segments of the demand curve and the supply curve respectively, and the third side is a straight line representing the government intervention.

Types of triangles

These discussions assume that the law of demand and law of supply hold for the particular good.

Harberger's triangle due to a price ceiling

If a price ceiling is set for a good or service that is below its market price (hence, it is a binding price ceiling) then the deadweight loss is given by a triangle with a horizontal base given by the line representing the price ceiling, and the other two sides being parts of the demand and supply curve between that price and the market price. The lower the price ceiling, the larger the triangle. The triangle is upward-pointing.

Harberger's triangle due to a price floor

If a price floor (or minimum price) if set for a good or service that is above its market price, then the deadweight loss due to it is given by a triangle with a horizontal base given by the line representing the price ceiling, and the other two sides being parts of the demand and supply curve between that price and the market price. The lower the price ceiling, the larger the triangle. Unlike the previous case, this triangle is downward-pointing.

Harberger's triangle due to taxes

A sales tax or tariff on the price of a good means that the price for the buyer is greater than the price for the seller. Thus, with such a tax, the equilibrium situation arises at that quantity of goods where the difference between the buyer's and seller's reservation prices equals the value of the sales tax. The Harberger triangle in this case has as one side the vertical line for the quantity of goods traded and the other two sides are the parts of the demand curve and supply curve from that quantity to the equilibrium quantity. The triangle is rightward-pointing.

Harberger's triangle due to subsidies

A subsidy to purchases or transactions means that the price for sellers is less than the price for buyers. The Harberger's triangular in this case has s one side the vertical line for the quantity of goods traded and the other two sides are the parts of the demand curve and supply curve from that quantity to the equilibrium quantity. Unlike the previous case, the triangle is leftward-pointing.