Final answer:
The imposition of a minimum or maximum price by the government leads to deadweight loss, which is the value of the trades not made due to the price control. This loss is graphically represented in economic models such as Figure 3.24 (a), where it is denoted by the area U + W.
Step-by-step explanation:
When a government imposes a minimum price or price floor above the equilibrium, it causes some transactions that would have occurred at the equilibrium price to not take place, creating a deadweight loss. Conversely, a maximum price or price ceiling set below the equilibrium can lead to a shortage since the quantity demanded at that price exceeds the quantity supplied. In either case, the deadweight loss reflects the value of the trades not made due to the price control and is represented by specific areas on a supply and demand graph.
For example, consider a scenario where a new back pain medication is introduced to the market. In the absence of government intervention, the equilibrium price would be $600, with 20,000 people using the drug, generating a certain level of consumer and producer surplus. If the government sets a maximum price of $400, production decreases to 15,000, thus creating a deadweight loss due to the resulting inefficient output level, which can be illustrated by specific areas on the graph in Figure 3.24 (a) as the area U + W.