Econ 402 Chapter 6

6.1-6.2- price policies

price ceiling (price cap)

-gov regulation making it illegal to charge a price higher than a certain level

-below equilibrium (efficient) (above would be inefficient as does not change consumer choices)

-ceiling → shortage (+ inc search activity)

Search activity: time spent looking for someone to do business with

-inc search activity = inc opportunity cost

-adding in search activity opportunity cost can make the full cost of housing higher than the price ceiling

illicit market (parallel/black market)

-encouraged by price ceiling

-often overcharged for small g/s

-level of illicit market is in relation to how enforced the price ceiling is

price ceiling graph sections

-b/c Q supplied < efficient Q → deadweight loss (grey triangle)

-producer surplus shrinks to blue triangle

-consumer surplus shrink to green triangle

-potential loss from inc search activity/opportunity cost is red rectangle (full loss of price ceiling = sum of deadweight + inc cost of search)

price ceiling effects

-price ceiling → shortage

Not fair:

-blocks volentary exchange

-might raise cost of housing more than price ceiling

Fair:

-benefits the less well off

price floor

-gov regulation making it illegal to charge lower than a certain price

-below equilibrium = ineffective, above = effective

-unregulated market lets laborers find jobs where they are most highly valued (efficient)

Minimum wage:

-surplus of labor (excess demand)

-demand curve= MSB from labor (value of g/s produced)

-MSB of labor > MSC → deadweight loss shrinks firms/workers surplus

--b/c Q of labor is leff efficient Q → deadweight loss

-firm/worker surplus shrink

-potential loss from inc job search is red rectangle

-full loss = deadweight + inc se

Taxes

tax incidence- division of burden of tax

-price payed rises by amount of tax → burden fully on buyer (D is perfectly inelastic or S is perfectly elastic)

-price payed rises by less than amount of tax → burden part on buyer and seller (Depends on elasticisty of s/d )

-price payed no change → burden fully on seller (D is perfectly elastic or S is perfectly inelastic)

tax on seller

-dec supply (add tax to min price seller willing to accept)

-EQ at new S and D curve

-amount paid by whom is D= difference in y axis, S= difference in x axis

tax on buyers
-dec D (subtract tax from D curve)

-EQ at new D and S curve

tax and efficiency

-tax makes MSB > MSC, shrink PS and CS and makes deadweight loss, tax rev as rectangle

-more steep a curve is, more tax payed

fairness of taxess

benefits principle

-ppl pay taxes equal to the benefit they recieved from services provided from gov

-those who benefit pay

-high fuel tax, alc tax

ability to pay principle

-pay taxes according to how much of the tax burden you cna handle

-tax rich more

quota

quota- produce up to this amount

-verticle line

-left EQ → no change

Right EQ:

-dec supply to quote ( new price is at quota line and to demand curve, supply is at supply curve)

-dec marginal cost (supply curve) b/c producing less and stop using resourced with highest marginal cost

-MSB = price (d curve) has inc. → MSB > MSC → deadweight loss

-get larger profit form producing one more unit (price exceeds marginal cost) _> incentive to cheat → inefficient quota (must make monitoring system)

subsidies

-payment from gov to producer

Effects:

-inc supply (like neg tax) (new S is S - subsidy amount)

-lowers price and inc QS (Proce by buyers in new S line, proce recived is old S line above new pt)

-inc marginal cost b/c producing more means using resourced not ideal (allocated effieinctly) to produce (MSC = price recieved by sellers)

-amount payed by gov = amount of subsidy mult by QS after inc production

-MS= market price which dec. MSC has inc. MSC>MSB → overproduction → ineffiecnt

illegal markets

-drug markets

-when g/s is illegal → cost of trading it inc (by how much depends on who bears the penalties) (larger penalties + more policing = higher cost)

penalty for sellers

-dec S by amount of penalty (add CBL to S)

penalty for buyers

-dec D by amount of penalty (demand - CBL)

penalty for sellers and buyers

-both S and D dec due to cost of breaking the law (CBL)

-heaver CBL for sellers → price rise above EQ

-heaver CBL for buyers → price below EQ

with enough penalty and policing → dec demand/supply to bring Q bought to zero

-in reality not possible b/c not enough policing resources and cost

-alternative is to heavily tax the drugs

taxing drigs

-high axes lead to tax evaders

-adds to CBL for breaking tax law