In equilibrium, 500 widgets are sold at $40 apiece. Suppose a new law prohibits the sale of widgets but requires certain firms to produce a total of 600 widgets and give them away for free. The recipients of the widgets are allowed to resell them.
a. Use a graph to illustrate the new price of widgets.
b. Assuming the widgets are produced as cheaply as possible, illustrate the gains and/or losses to consumers, producers, and the people who get the free widgets. Illustrate the deadweight loss.
c. Explain why the "as cheaply as possible" assumption is overly optimistic, and how it biases your computation of the deadweight loss.