Government Intervention Microeconomic
Government Intervention Microeconomic
➢ Government Intervention
• Price Controls and Production Quotas
• Import Quotas and Tariffs
• Excise Tax and Subsidy
Motivation Example
3
➢ Suppose you are considering buying a particular automobile and that you
are willing to pay up to $150,000 for it. But you can buy that automobile
for $120,000 in the marketplace.
➢ Will you feel happy when you see the price is $120,000? And Why?
Consumer Surplus
4
➢ Consumer surplus
difference between what a
consumer is willing to pay for
a good and the amount
actually paid.
➢ Producer surplus
the total profits of producers,
plus rents to capital.
➢ Price controls
The price of a good has been regulated
to be no higher than Pmax, which is
below the market-clearing price P0.
➢ Market failure
Situation in which an unregulated competitive market is inefficient because
prices fail to provide proper signals to consumers and producers.
➢ Externalities
➢ Lack of information
Example: Minimum Wage
9
➢ Supporters’ arguments:
Help the poorest class
Encourage people to join workforce rather than earning money by illegal means
Increase work ethic
➢ Opponents’ arguments:
Increase unemployment
Increase labor cost (hurt small business more)
Increase price inflation
➢ Still debating
Card and Krueger (1993), Harasztosi and Lindner (2019), Dustmann et al. (2022)
Example
11
➢ The labor market demand and supply curves are given as follows:
𝐿𝑠 = 100 + 𝑤,
𝐿𝑑 = 500 − 𝑤,
where 𝐿𝑠 and 𝐿𝑑 are labor supply and labor demand, and 𝑤 is weekly wage.
The government enacted a minimum wage, 𝑤𝑚𝑖𝑛 = 300. How much the total
wage (𝑤 × 𝐿) changes in response to the enforcement of the minimum wage?
Price Supports
12
➢ Price support
Price set by government above
free-market level and maintained
by governmental purchases of
excess supply.
➢ ∆PS = A+B+D
∆CS = -A-B
∆PS + ∆CS = D
Price Supports
13
➢ Cost to govt.
The cost to the government (which
is ultimately a cost to consumers) is
(𝑄2 − 𝑄1 )𝑃𝑠
➢ In recent years, the world price U.S. production: 17.9 billion pounds
of sugar has been between 10
U.S. consumption: 24 billion pounds
and 28 cents per pound, while
the U.S. price has been 30 to U.S. price: 27 cents per pound
40 cents per pound. Why? World price 17 cents per pound
D
➢ There are now “two prices” Dperceived
𝑄1 𝑄0 Q
Sellers receive 𝑝𝑠
Buyers pay 𝑝𝑑 = 𝑝𝑠 + 𝜏
Taxation
22
Tax: 𝜏 = 1 𝑝0
𝑝𝑠
𝑝𝑑
A
𝜏 𝑝0
C E
D F
𝑝𝑠
D
Dperceived
𝑄1 𝑄0 Q
➢ (a) If demand is very inelastic relative to supply, the burden of the tax falls mostly
on buyers (|𝑒𝑠 | > |𝑒𝑑 |).
(b) If demand is very elastic relative to supply, it falls mostly on sellers (|𝑒𝑠 | < |𝑒𝑑 |).
➢ we can calculate the percentage of the tax that is “passed through” to consumers:
|𝑒𝑠 | /(|𝑒𝑠 | + |𝑒𝑑 |).
Example
26
➢ During the last three decades, tax on physical equipment, including industrial robots,
has been halved in the US, while tax on labor income has been stable.
➢ The robot installation has been rapidly raised in the US, simultaneously.
Example: Tax on Robots
29
➢ Many people, including Bill Gates, suggest that the governments should tax
robots at a rate similar to what we have taxed the workers.
➢ The opponents of robot tax, including Larry Summers (formal U.S. Ministry
of Finance), argues that the tax will interrupt innovation and technological
progress.
➢ What will happen if the governments levy taxes on robots? What factors
will determine the effects?
➢ The elasticity of labor demand to robot taxes
➢ The complementarity between human labor and robots
➢ The price elasticity of robot demand