chapter 9 the analysis of competitive markets. chapter 92 q: rent control chuncheon city decided to...
TRANSCRIPT
Chapter 9
The Analysis of Competitive Markets
Chapter 9 2
Q: Rent Control
Chuncheon City decided to control rent around KNU campus for students.
Are KNU students going to be better off?
Chapter 9 3
Consumer and Producer Surplus
1. is the total benefit or value that consumers receive beyond what they pay for the good.
Chapter 9 4
Consumer and Producer Surplus
2. is the total benefit or revenue that producers receive beyond what it cost to produce a good.
Chapter 9 5
Consumer and Producer Surplus
Between 0 and Q0 producers receive
a net gain from selling each product--
producer surplus.
Quantity
Price
S
D
Q0
5
9
Between 0 and Q0
consumer A receives a net gain from buying
the product-- consumer surplus
ProducerSurplus
3
QD QS
Chapter 9 6
Consumer and Producer Surplus
To determine the welfare effect of a governmental policy we can measure the gain or loss in consumer and producer surplus.
Chapter 9 7
B
A C
Price Control and Surplus Changes
Quantity
Price
S
D
P0
Q0
Pmax
Q1 Q2
Chapter 9 8
Price controls and Welfare Effects
The total loss is equal to area .The is the inefficiency
of the price controls – the total loss in surplus (consumer plus producer)
If demand is sufficiently inelastic, losses to consumers may be fairly large
Chapter 9 9
B
APmax
C
Q1
With inelastic demand, triangle B can be larger
than rectangle A and consumers suffer net
losses from price controls.
S
D
Price Controls With Inelastic Demand
Quantity
Price
P0
Q2
Chapter 9 10
The Efficiency ofa Competitive Market
In the evaluation of markets, we often talk about whether it reaches economic efficiency
Policies such as price controls that cause dead weight losses in society are said to impose an efficiency cost on the economy
Chapter 9 11
The Efficiency ofa Competitive Market
If efficiency is the goal, then you can argue leaving markets alone is the answer
However, sometimes occur
Chapter 9 12
Types of Market Failures
1. Costs or benefits that do not show up as
part of the market price (e.g. pollution) Costs or benefits are external to the market
2. Imperfect information prevents consumers
from making utility-maximizing decisions. Government intervention may be
desirable in these cases
Chapter 9 13
The Efficiency of a Competitive Market
Other than market failures, unregulated competitive markets lead to economic efficiency
What if the market is constrained to a price higher than the economically efficient equilibrium price?
Chapter 9 14
BA
C
Price Control and Surplus Changes
Quantity
Price
S
D
P0
Q0
Pmin
Q1 Q2
Chapter 9 15
The Efficiency of a Competitive Market
Deadweight loss triangles, B and C, give a good estimate of efficiency cost of policies that force price above or below market clearing price.
Measuring effects of government price controls on the economy can be estimated by measuring these two triangles
Chapter 9 16
Minimum Wages
Wage is set higher than market clearing wage
Decreased quantity of workers demanded
Those workers hired receive higher wages
Unemployment results since not everyone who wants to work at the new wage can
Chapter 9 17
BC
A
L1 L2
Unemployment
wmin
S
D
w0
L0
The Minimum Wage
L
w
Chapter 9 18
Price Supports
Much of agricultural policy is based on a system of .
Government can also increase prices through restricting production, directly or through incentives to producers
Chapter 9 19
Price Supports
What are the impacts on consumers, producers and the federal budget?
Chapter 9 20
Price Supports
Government may be able to “dump” some of the goods in the foreign markets
Total welfare effect of policy
CS + PS – Govt. cost = D – (Q2-Q1)PS
Society is worse off over allLess costly to simply give farmers the
money
Chapter 9 21
B
DA
To maintain a price Ps
the government buys quantity Qg .
D + Qg
Qg
Price Supports
Quantity
PriceS
D
P0
Q0
Ps
Q2Q1
E
Net Loss to society is E + B
Chapter 9 22
Production Quotas
The government can also cause the price of a good to rise by reducing supply.Limitations of taxi medallions in New York
CityLimitation of required liquor licenses for
restaurants
Chapter 9 23
BA
C
Supply Restrictions
Quantity
Price
D
P0
Q0
S
S’
PS
Q1
Chapter 9 24
Import Quotas and Tariffs
Many countries use import quotas and tariffs to keep the domestic price of a product above world levelsImport quotas: Limit on the quantity of a
good that can be importedTariff: Tax on an imported good
This allows domestic producers to enjoy higher profits
Costs to consumers is high
Chapter 9 25
QS QD
PW
AB C
Import Tariff To Eliminate Imports
Quantity
Price
Q0
D
P0
S
Imports
Chapter 9 26
The Impact of a Tax or Subsidy
The government wants to impose a $1.00 tax on movies. It can do it two waysMake the producers pay $1.00 for each
movie ticket they sellMake consumers pay $1.00 when they buy
each movie
In which option are consumers paying more?
Chapter 9 27
The Impact of a Tax or Subsidy
The burden of a tax (or the benefit of a subsidy) falls partly on the consumer and partly on the producer.
How the burden is split between the parties depends on the relative elasticities of demand and supply.
Chapter 9 28
The Effects of a Specific Tax
For simplicity we will consider a specific tax on a good
For our example, consider a specific tax of $t per widget sold
Chapter 9 29
Incidence of a Specific Tax
D
S
B
D
A
C
Quantity
Price
P0
Q0Q1
PS price producers get
Pb price buyers pay
Tax = $1.00
Chapter 9 30
Incidence of a Specific Tax
In the previous example, the tax was shared almost equally by consumers and producers
If demand is relatively inelastic, however, burden of tax will fall mostly on buyers
If supply is relatively inelastic, the burden of tax will fall mostly on sellers
Impact of Elasticities on Tax Burdens
Quantity Quantity
Price Price
S
D S
D
Q0
P0 P0
Q0Q1
Pb
PS
t
Q1
Pb
PS
t
Burden on Buyer Burden on Seller