0% found this document useful (0 votes)
13 views28 pages

Government Intervention Microeconomic

The document outlines concepts of economic efficiency, including consumer and producer surplus, and discusses government interventions such as price controls, tariffs, and taxes. It examines the effects of these interventions on market welfare, including deadweight loss and changes in consumer and producer surplus. Additionally, it provides examples, such as minimum wage and sugar quotas, to illustrate the impact of government policies on market dynamics.

Uploaded by

aarongilson1006
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
13 views28 pages

Government Intervention Microeconomic

The document outlines concepts of economic efficiency, including consumer and producer surplus, and discusses government interventions such as price controls, tariffs, and taxes. It examines the effects of these interventions on market welfare, including deadweight loss and changes in consumer and producer surplus. Additionally, it provides examples, such as minimum wage and sugar quotas, to illustrate the impact of government policies on market dynamics.

Uploaded by

aarongilson1006
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 28

Outline

➢ Measuring Economic Efficiency


• Consumer Surplus (CS)
• Producer Surplus (PS)

➢ 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.

➢ Consumer A would pay $10


for a good whose market price
is $5 and therefore enjoys a
benefit of $5.

➢ Consumer B enjoys a benefit


of $2, and Consumer C, who
values the good at exactly the
market price, enjoys no
benefit.
Producer Surplus
5

➢ Producer surplus
the total profits of producers,
plus rents to capital.

➢ The benefit that lower-cost


producers enjoy by selling at
the market price is higher.

➢ Together, consumer and


producer surplus measure the
welfare benefit of a
competitive market.
Welfare Effects of Price Controls
6

➢ Welfare effects: gains and losses to


consumers and producers.

➢ Deadweight loss: net loss of total


(consumer plus producer) surplus.

➢ Price controls
The price of a good has been regulated
to be no higher than Pmax, which is
below the market-clearing price P0.

➢ ∆ Consumer surplus (CS) = A-B


∆ Producer surplus (PS) = -A-C
Deadweight loss = ∆CS + ∆PS = -B-C
Welfare Effects of Price Controls
7

➢ If demand is sufficiently inelastic,


triangle B can be larger than
rectangle A. In this case,
consumers suffer a net loss from
price controls.
Efficiency of Competitive Market
8

➢ Total surplus is maximized at competitive market equilibrium. How does the


competitive market achieve economic efficiency? Invisible Hand!
➢ No central planner
Each consumer maximizes his/her own utility. Each firm maximizes its own profit.
➢ One price rule and “the right price”
Every consumer who is willing to pay more than the cost of producing extra
output is able to buy; every consumer who is not willing to pay the cost of the
extra output does not buy.

➢ 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

➢ Although the market-clearing


wage is 𝑤0 , firms are not allowed
to pay less than 𝑤𝑚𝑖𝑛 .

➢ This is a price floor situation;


prices cannot fall below 𝑤𝑚𝑖𝑛 by
government mandate.

➢ This results in unemployment of an


amount 𝐿2 − 𝐿1 and a
deadweight loss given by
triangles B and C.
Example: Minimum Wage
10

➢ 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.

➢ To maintain a price 𝑃𝑠 above the


market-clearing price 𝑃0 , the
government buys a quantity 𝑄𝑔 .

➢ ∆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

➢ The total change in welfare is

∆𝐶𝑆 + ∆𝑃𝑆 − Cost to govt.


= 𝐷 − (𝑄2 − 𝑄1 )𝑃𝑠
Production Quotas
14

➢ To maintain a price 𝑃𝑠 above the


market-clearing price 𝑃0 , the
government can restrict supply to
𝑄1 .

➢ Output can be reduced by


incentives rather than by outright
quotas.

➢ For an incentive to work, it must


be at least as large as B + C + D,
which would be the additional
profit earned by planting, given
the higher price 𝑃𝑠 .
Import Quotas and Tariffs
15

➢ Import quota: Limit on the


quantity of a good that can be
imported.
Tariff: Tax on an imported good.

➢ In a free market, the domestic


price equals the world price 𝑃𝑤 .

A total 𝑄𝑑 is consumed, of which


𝑄𝑠 is supplied domestically and
the rest imported.

When imports are eliminated, the


price is increased to 𝑃0 .
Import Quotas and Tariffs
16

➢ When imports are reduced, the


domestic price is increased from
𝑃𝑤 to 𝑃∗ . This can be achieved by
a quota, or by a tariff 𝑃∗ − 𝑃𝑤 .

➢ If a tariff is used, the government


gains D, the revenue from the
tariff. The net domestic loss is B +
C.

➢ If a quota is used instead,


rectangle D becomes part of the
profits of foreign producers, and
the net domestic loss is B + C + D.
Example: Sugar Quota
17

➢ 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

➢ By restricting imports, the U.S. government protects the $4 billion domestic


sugar industry, which would virtually be put out of business if it had to
compete with low-cost foreign producers. This policy has been good for U.S.
sugar producers, but bad for consumers.

U.S. supply : QS = - 8.95 + 0.99P


U.S. demand : QD = 31.20 - 0.27P
Example: Sugar Quota
18

➢ At the world price of 17 cents per


pound, about 26.7
billion pounds of sugar would
have been consumed in 2016, of
which all but 8 billion pounds
would have been imported.

➢ Restricting imports to 6.1 billion


pounds caused the U.S. price to
go up by 10 cents.
Example: Sugar Quota
19

➢ The cost to consumers, A + B + C


+ D, was about $2.5 billion.

➢ The gain to domestic producers


was trapezoid A, about $1.3
billion.

➢ Rectangle D, $610 million, was a


gain to those foreign producers
who obtained quota allotments.

➢ Triangles B and C represent the


deadweight loss of about $631
million.
Taxation
20

➢ The biggest source of revenue for governments is through taxation. What is


the effect of taxation on perfectly competitive markets?

➢ We will analyze the effect of specific taxes (easier to study)


 Specific tax: tax of a certain amount of dollars per unit (regardless of prices)
 Ad valorem tax: tax of a certain percentage of the value of the product

➢ How does the burden of taxes split to consumer and producer?


Taxation
21

➢ Let’s say, the government put 𝜏


dollars of tax per unit. Then,
consumers take the tax into
account. P
S

➢ From the seller’s perspective, it is 𝜏

as if the demand curve shifted 𝑝𝑑


to the left (𝐷 → 𝐷 𝑝𝑒𝑟𝑐𝑒𝑖𝑣𝑒𝑑 ). 𝑝0
 “as if” because demand didn’t really
𝑝𝑠
change. Actual demand (𝐷) is based
on the after-tax price!

D
➢ There are now “two prices” Dperceived
𝑄1 𝑄0 Q
 Sellers receive 𝑝𝑠
 Buyers pay 𝑝𝑑 = 𝑝𝑠 + 𝜏
Taxation
22

➢ How to find the equilibrium?


 Demand equals supply: 𝑄𝑑 = 𝑄𝑠
 Prices are consistent: 𝑝𝑑 = 𝑝𝑠 + 𝜏
P
S
➢ For example,
𝜏
 Demand function: 𝑄𝑑 𝑝𝑑 = 150 − 25𝑝𝑑
 Supply function: 𝑄𝑠 𝑝𝑠 = 60 + 20𝑝𝑠 𝑝𝑑

 Tax: 𝜏 = 1 𝑝0

𝑝𝑠

➢ Demand equals supply:


150 − 25𝑝𝑑 = 60 + 20𝑝𝑠
D
Dperceived
𝑄1 𝑄0 Q
➢ Substitute price condition:
150 − 25 𝑝𝑠 + 1 = 60 + 20𝑝𝑠
→ 𝑝𝑠 = 1.44, 𝑝𝑑 = 2.44, 𝑄1 = 88.9
Welfare Effect of Tax
23
P S

𝑝𝑑
A
𝜏 𝑝0
C E
D F
𝑝𝑠

D
Dperceived
𝑄1 𝑄0 Q

Without tax With tax Change


Consumer Surplus A+C+E A -C-E
Producer Surplus B+D+F B -D-F
Govt Revenue 0 C+D +C+D
Total Surplus A+B+C+D+E+F A+B+C+D -E-F
(DWL)
Incidence of Tax
24

➢ Who actually bears the tax?

➢ From previous example,


 Demand function: 𝑄𝑑 𝑝𝑑 = 150 − 25𝑝𝑑 P S
 Supply function: 𝑄𝑠 𝑝𝑠 = 60 + 20𝑝𝑠
 Tax: 𝜏 = 1
 𝑝𝑠 = 1.44, 𝑝𝑑 = 2.44, 𝑄1 = 88.9
𝑝𝑑
A
𝜏 𝑝0
C E
➢ We can also calculate price without tax: F
150 − 25𝑝0 = 60 + 20𝑝0 → 𝑝0 = 2 𝑝𝑠
D
B
➢ The burden of the $1 tax fell more on
producers in this case: Dperceived
D

 Consumers pay 2.44 − 2 = $0.44 more per unit 𝑄1 𝑄0 Q

 Producers receive 2 − 1.44 = $0.56 less per unit


Incidence of Tax
25

➢ (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

➢ In a perfectly competitive market of gasoline, the supply and demand


curves are given by:
𝑄𝑑 = 400 − 2𝑃,
𝑄𝑠 = 100 + 3𝑃
Where 𝑃 is the price of a barrel of gasoline in dollar, 𝑄𝑑 is the demanded barrels
of gasoline, and 𝑄𝑠 is the supplied barrels of gasoline. If the deadweight loss
caused by imposing a specific tax on consumers is 135, what is the size of the
tax imposed in dollar?
Example: Tax on Robots
27

➢ The installation of industrial


robots has been tripled from
166k to 517k in the last decade
(2011-2021).
Especially, China experienced a
tenfold increase during the same
period (23k → 243k).

➢ At the same time, there is a


growing concern that robots will
displace human labor in the
production process.
Example: Tax on Robots
28

Source: Acemoglu, Manera, and Restrepo (2020)

➢ 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

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy