Professional Documents
Culture Documents
ECON2101/ECON2210
Bei Qin
1 / 47
2 / 47
9.4
CS = A B Producer surplus: PS = A + B + D Price Supports and Production Quotas Cost to government: (Q2 Q1 )Ps
Consumer surplus:
price support Price set by government above free-market level and cost to Govt.= maintained by governmental purchases of excess supply.
welfare = CS + PS
D (Q2 Q1 )Ps
FIGURE 9.10
PRICE SUPPORTS To maintain a price Ps above the market-clearing price P0, the government buys a quantity Qg. The gain to producers is A + B + D. The loss to consumers is A + B. The cost to the government is the speckled rectangle, the area of which is Ps(Q2 Q1).
3 / 47
Ps
Q1 , either by imposing
P0 , the
roduction Quotas
Quotas:
GURE 9.11
PPLY RESTRICTIONS
maintain a price Ps above the arket-clearing price P0, the vernment can restrict supply to Q1, her by imposing production quotas s with taxicab medallions) or by ving producers a financial incentive reduce output (as with acreage mitations in agriculture).
r an incentive to work, it must be at ast as large as B + C + D, which ould be the additional profit earned planting, given the higher price Ps. e cost to the government is erefore at least B + C + D.
Q1
4 / 47
Ps
Q1 , either by imposing
P0 , the
Quotas:
setting quotas on how much each rm can produce. The quantity supplied is restricted to market clearing level
S at Q1 CS : A B PS : A C welfare : B C
vertical line
Q0 .
5 / 47
Incentive programs:
inelastic at
Q1 , and the market price is increased from P0 to P1 . CS : A B Cost to gvt.: Incentive given to producers B + C + D PS : A C + incentive (B + C + D )= A + B + D welfare : B C
6 / 47
Consumer surplus and producer surplus: no change Cost to gvt: (Q2 Q1 )Ps > B + C + D Deadweight loss: Dprice support > Dincentive programs
Which policy is better is determined by the goal of policies.
If the govt. just want to protect the benet of farmer for rice, wheat etc., price support or incentive programs is better?
Neither. How about lump sum transfer? A + B + D to farmers, no deadweight loss.
Quantity Taxes & Market receives by the amount of tax, ex. t cents. Market Equilibrium Market
p demand supply No tax
p*
q*
D(p), S(p)
8 / 47
Quantity Taxes & Market receives by the amount of tax, ex. t cents. Market Equilibrium Market
p demand $t supply
p*
q*
D(p), S(p)
9 / 47
pb p* ps qt q*
An excise tax raises the market supply curve by $t, raises the buyers price and lowers the quantity traded. D(p), S(p)
10 / 47
p*
$t
q*
D(p), S(p)
11 / 47
pb p* ps qt q*
$t
An sales tax lowers the market demand curve by $t, lowers the sellers price and reduces the quantity traded. D(p), S(p)
12 / 47
pb p* ps qt q*
$t
A sales tax levied at rate $t has the same effects on the markets equilibrium as does an excise tax levied at rate $t. D(p), S(p)
13 / 47
pb p* ps qt q*
D(p), S(p)
14 / 47
pb p* ps
qt q*
D(p), S(p)
15 / 47
pb p* ps qt q*
pb p* ps
qt q*
D(p), S(p)
17 / 47
1. The quantity sold and the buyer's price Pb must lie on the demand curve Q D = Q D (Pb ) 2. The quantity sold and the seller's price Ps must lie on the supply curve Q S = Q S (Ps ) 3. The quantity demanded must equal the quantity supplied 4. The dierence between the price the buyer pays and the price the seller receives must equal the tax t Pb Ps = t
QD = QS
Example
Midterm 3.2
pb p* ps qt q* q
19 / 47
The incidence of a quantity tax depends upon the own-price elasticities of demand and supply.
20 / 47
pb p* ps qt q* q
21 / 47
Around p = p , the own-price elasticity of demand is q /q q p approximately ED = (pb = p p b p )/p E D q Around p = p , the own-price elasticity of supply is q /q q p = p p approximately ES = (pS S p )/p ES q pb p ES Tax incidence = p pS E D
A tax falls mostly on the buyer if the seller if
ES is ED
ES ED
small.
22 / 47
ES is ED
ES ED
small.
FIGURE 9.18
IMPACT OF A TAX DEPENDS ON ELASTICITIES OF SUPPLY AND DEMAND (a) If demand is very inelastic relative to supply, the burden of the tax falls mostly on buyers. 23 / 47
ES is ED
ES ED
small.
(a)IMPACT inelastic demand, theON burden of theOF tax falls AND mostly on buyers; OF A TAX DEPENDS ELASTICITIES SUPPLY DEMAND If demand is very inelastic relative to supply, burden of the tax falls mostly on buyers. 24 / 47 (b) (a) elastic demand, it falls mostly on the sellers.
FIGURE 9.18
CS A B , PS = C D .6 The Impact of a= Tax or Subsidy Govt. tax revenue = tQ1 = A + D HE EFFECTS OF A SPECIFIC TAX
specific tax
welfare
B C
GURE 9.17 CIDENCE OF A TAX b is the price (including the tax) paid y buyers. Ps is the price that sellers ceive, less the tax.
ere the burden of the tax is split venly between buyers and sellers.
uyers lose A + B.
ellers lose D + C.
he deadweight loss is B + C.
25 / 47
1. 2. 3. 4.
Q D = Q D (Pb ) Q S = Q S (Ps ) QS = QD Ps Pb = s
Examples
Midterm 3.2.
of a Subsidy
ayment reducing the buyers price below the sellers The benet of a subsidy accrues mostly to buyers if S is large ED gative tax. and mostly to sellers if ES is smaller .
e thought of as a e a tax, the benefit of between buyers and ng on the relative pply and demand.
CS
PS
Import quota:
imported. 5 Import Quotas and Tariffs Without import: (Q0 , P0 ) mport quota Limit on the quantity of a good that can be imported. With import: (Qd , Pw ), where domestic ariff Tax on an and imported good. (Qd Qs ) import
industry provides
Qs ,
free market, the domestic price als the world price Pw.
28 / 47
Import quota:
imported. Without import:
Qs ,
29 / 47
(Q0 , P0 ) With import: (Qd , Pw ), where domestic industry and import (Qd Qs ) If Tarrif = P0 Pw , no import. Same eect on
Without import: as quota described above.
Tari:
provides
Qs , PS
CS
and
30 / 47
31 / 47
For quota and tari that both raise the price from Pw to P , tari is better
quota: welfare = B D C tari: welfare = B C
32 / 47
Non-competitive market
Perfectly competitive markets
Price taking: a large number of buyers and sellers, none of them individually can aect price Product homogeneity: no rm can raise its price without losing most or all of its business Free Entry and Exit.
Non-competitive markets
Monopoly: market with only one seller. Market in which only a few rms compete with one another, and entry by new rm is impeded. Monopsony: market with only one buyer.
Market power: ability of a seller or buyer to aect the price of a good.
33 / 47
Monopoly
What causes monopolies?
Entry barriers: legal at (postal service); patent ( new drugs); sole ownership of a resource (nuclear energy) Large economies of scale: e.x. towngas Collaboration: formation of a cartel (e.x. OPEC)
The monopolist is the market and completely controls the amount of output provided. The monopolist's demand curve is the (downward sloping) market demand curve. So the monopolist can alter the market price by adjusting its output level.
34 / 47
y*
At the profit-maximizing output level the slopes of (y) the revenue and total cost curves are equal; MR(y*) = MC(y*).
35 / 47
Example
P
Linear demand:
21
42
36 / 47
dC (y ) dy
Example
C (y ) = y 2 + 8, then MC (y ) = 2y At the prot-maximizing output level y , MR (y ) = MC (y ), y = 10.5. Then, the market price is p(y ) = 42 y = 31.5
P MC(y)=2y 42 P(y)=42-y MR(y)=42-2y
y*
21
42
37 / 47
dC (y ) dy
Example
P
C (y ) = y 2 + 8, then MC (y ) = 2y At the prot-maximizing output level y , MR (y ) = MC (y ), y = 10.5. Then, the market price is p(y ) = 42 y = 31.5
MC(y)=2y P(y)=42-y MR(y)=42-2y
42 P*
y*
21
42
38 / 47
39 / 47
pMC is p
p=
+ (1/Ed )
40 / 47
MC
A monopolist charges a price that exceeds marginal cost, but by an amount that depends inversely on the elasticity of demand.
Ed
So a prot-maximizing monopolist always selects an output level for which market demand is elastic.
p(y
)=
MC = p = MC + (p MC ) = MC + ( ) 1 + Ed
Markup pricing: output price is the marginal cost of production plus a markup.
41 / 47
MC = p MC = 1 + Ed
+ (1/Ed )
MC
p(y
E.x. if
)=
+ (1/Ed )
42 / 47
The monopolist's output decision depends not only on marginal cost but also on the shape of the demand curve. Shifts in demand do not trace out the series of prices and quantities that correspond to a competitive supply curve.
Optimal decision:
MR (y ) = MC (y ) = y D (p ) = y = p
43 / 47
ve D1 shifts D 2.
s now more
It raises the marginal cost of production by $t. So the tax reduces the prot-maximizing output level, causes the market Quantity price to rise. Tax Levied on a Monopolist
$/output unit p(y) p(y*) MC(y)
y* MR(y)
y
45 / 47
It raises the marginal cost of production by $t. So the tax reduces the prot-maximizing output level, causes the market price to rise. The optimal production decision is given by
yt y*
46 / 47
Suppose a specific S ifi t tax of f t dollars d ll per unit it i is l levied, i d so th that t the th monopolist must remit t dollars to the government for every unit it sells. If MC was the firms original marginal cost, its optimal production decision is now given by g y Eect of a quantity tax of $t /output unit.
The price can increase by less than or more than the tax.
FIGURE 10.5 10 5
EFFECT OF EXCISE TAX ON MONOPOLIST With a tax t per unit, unit the firm firms s effective marginal cost is increased by the amount t to MC + t. In this example, the increase in price P is i l larger than h the h tax t.
d p(y ) = 1cE +Ed , the tax increases MC to t )Ed (c + t ), changing price to p (y t ) = (c1+ +Ed . The amount of tax paid cEd (c +t )E t d by buyers is p (y ) p (y ) = 1+E d 1+E = 1tE + E d d d Ed Ed < 1, 1+ Ed > 1 and so the monopolist passes on to consumers
Suppose MC is constant,
13 of 52
47 / 47