Transcript Chapter 9
Chapter 9 The Analysis of Competitive Markets Q: Rent Control Chuncheon City decided to control rent around KNU campus for students. Are KNU students going to be better off? Chapter 9 2 Consumer and Producer Surplus 1. Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good. Chapter 9 3 Consumer and Producer Surplus 2. Producer surplus is the total benefit or revenue that producers receive beyond what it cost to produce a good. Chapter 9 4 Consumer and Producer Surplus Price 9 Consumer Surplus S Between 0 and Q0 consumer A receives a net gain from buying the product-consumer surplus 5 Producer Surplus 3 D QD QS Q0 Chapter 9 Between 0 and Q0 producers receive a net gain from selling each product-producer surplus. Quantity 5 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. Welfare Effects Chapter 9 6 Price Control and Surplus Changes Price S B P0 A C Pmax D Q1 Q0 Chapter 9 Q2 Quantity 7 Price controls and Welfare Effects The total loss is equal to area B + C. The deadweight loss 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 8 Price Controls With Inelastic Demand D Price S B P0 Pmax With inelastic demand, triangle B can be larger than rectangle A and consumers suffer net losses from price controls. C A Q1 Q2 Chapter 9 Quantity 9 The Efficiency of a 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 10 The Efficiency of a Competitive Market If efficiency is the goal, then you can argue leaving markets alone is the answer However, sometimes market failures occur Chapter 9 11 Types of Market Failures 1. Externalities 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. Lack of Information Imperfect information prevents consumers from making utility-maximizing decisions. Government intervention may be desirable in these cases Chapter 9 12 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 13 Price Control and Surplus Changes Price S Pmin A B P0 C D Q1 Q0 Chapter 9 Q2 Quantity 14 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 15 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 16 The Minimum Wage w S wmin A B C w0 Unemployment L1 L0 Chapter 9 D L2 L 17 Price Supports Much of agricultural policy is based on a system of price supports. Government can also increase prices through restricting production, directly or through incentives to producers Chapter 9 18 Price Supports What are the impacts on consumers, producers and the federal budget? Chapter 9 19 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 all Less costly to simply give farmers the money Chapter 9 20 Price Supports Price S Qg Ps A P0 To maintain a price Ps the government buys quantity Qg . D B Net Loss to society is E + B D + Qg E D Q1 Q0 Q2 Chapter 9 Quantity 21 Production Quotas The government can also cause the price of a good to rise by reducing supply. Limitations of taxi medallions in New York City Limitation of required liquor licenses for restaurants Chapter 9 22 Supply Restrictions S’ Price S PS A B P0 C D Q1 Q0 Chapter 9 Quantity 23 Import Quotas and Tariffs Many countries use import quotas and tariffs to keep the domestic price of a product above world levels Import quotas: Limit on the quantity of a good that can be imported Tariff: Tax on an imported good This allows domestic producers to enjoy higher profits Costs to consumers is high Chapter 9 24 Import Tariff To Eliminate Imports Price S P0 A B C PW Imports D QS Q0 Chapter 9 QD Quantity 25 The Impact of a Tax or Subsidy The government wants to impose a $1.00 tax on movies. It can do it two ways Make the producers pay $1.00 for each movie ticket they sell Make consumers pay $1.00 when they buy each movie In which option are consumers paying more? Chapter 9 26 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 27 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 28 Incidence of a Specific Tax Price S Pb price buyers pay Tax = $1.00 A B P0 PS price producers get C D D Q1 Chapter 9 Q0 Quantity 29 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 Chapter 9 30 Impact of Elasticities on Tax Burdens Burden on Buyer Burden on Seller D Price Price S Pb S t Pb P0 P0 PS t D PS Q1 Q0 Quantity Q1 Q 0 Quantity