Page 1: Introduction to Government Policies

Principles of Microeconomics

• Topic: Supply and Demand

• Lecture: 6 (L6) Government Policies

• Presenter: Tien-Der Jerry Han

• Context: Review background information.

Page 2: Aims of the Lecture

Learning Objectives

• Understand the role of government policies in economics.

• Apply basic economic tools.

• Analyze government interventions aimed at improving market efficiency and equity.

Key Concepts

• Price controls: mechanisms to regulate low or high prices.

• Indirect taxes: means to generate government revenue for redistribution.

• Importance of understanding basic economics to avoid unintended consequences.

Page 3: Lecture Outline

1. Price Ceilings: Rent Controls

2. Price Floors: Minimum Wage

3. Indirect Taxes: The US Luxury Tax

Page 4: Reading Assignments

Suggested Readings

• No specific reading for Lipsey and Chrystal editions.

• For Sloman, Wride, and Garratt:

  • Chapter 3.1-3.2 (11th ed.), pages 78-92

  • Chapter 3.3-3.5 (9th ed.), pages 80-98

Page 5: Price Ceilings

Understanding Price Ceilings

• A price ceiling is a maximum price set by the government.

• Objective: Prevent high market prices.

Market Dynamics

• Effects:

  • No effect if set above equilibrium price.

  • Binding price ceilings lower market price, creating excess demand.

  • Graphical representation shows quantity demanded (QD) exceeding quantity supplied (QS).

Page 6: Case Study: Social Housing and Rent Control

Current Scenario in London

• High renting costs in London prompted consideration of rent controls.

• Short-run market dynamics reveal increased excess demand risk over the long-term.

Page 7: Case Study: Berlin's Rent Control

Reality Check

• Berlin's rent control experiment deemed a failure after one year.

• Results: Decreased rents but also diminished housing supply.

Page 8: Alternatives to Rent Control

Government Interventions

• Strategies to influence housing supply and demand:

  • Cap on benefits can suppress housing demand.

  • Building new homes can enhance supply of rental properties.

Page 9: Case Study: Singapore

Affordable Housing Success

• Singapore maintains high home ownership rates via effective housing programs.

• Contrast between general perceptions and reality of government-built housing.

Page 10: Price Floors

Understanding Price Floors

• A price floor is a minimum price set by governments.

• Objective: Prevent unfairly low prices.

Market Dynamics

• Effects:

  • No effect if set below equilibrium price.

  • Binding price floors raise market price, creating excess supply.

Page 11: Case Study: Minimum Wage Impact

Minimum Wage Legislation

• Ensures adequate income but controversial due to potential unemployment impacts.

Elasticity Considerations

• Impact of minimum wage varies based on elasticity of labor demand and supply.

Page 12: Effects on Product Market

Minimum Wage and Supply

• Increases operational costs for firms hiring low-skilled workers.

• Long-term effects predicted for supply and equilibrium prices.

Page 13: Minimum Wage Theory vs. Reality

Analysis of UK Employment Rates

• Trend analysis from 2000-2017 shows minimal correlation between rising minimum wage and unemployment rates.

Page 14: Taxation Effects on Goods

Tax Models

• Types of taxes:

  • Specific: Fixed amount per unit sold.

  • Ad Valorem: Percentage of the sale price.

Tax Impact

• Both taxes affect supply trajectories and market price information for demand.

Page 15: Tax Incidence

Distribution of Tax Burden

• Tax burden breakdown between buyers and sellers illustrated.

• Tax incidence relies on the relative elasticities of demand and supply.

Page 16: Elasticity and Tax Impact

Burden Distribution

• If demand is more inelastic, greater tax burden falls on buyers.

Page 17: Case Study: US Luxury Tax

Examination of Luxury Tax Legislation

• Introduced in 1990 on luxury goods like yachts.

• Aimed to tax wealthier individuals, results indicated unanticipated burden on yacht builders due to elastic demand and inelastic supply.

Page 18: Summary of Findings

Key Takeaways

• Price Ceilings: Lower prices can create excess demand.

• Price Floors: Greater prices can foster excess supply.

• Indirect Taxes: Decrease supply and raise equilibrium prices.

Page 19: Lecture Outcomes

Expected Competencies

1. Ability to describe market effects of price ceilings and floors.

2. Explain burden distribution associated with indirect taxes.

3. Illustrate supply and demand diagrams illustrating these economic principles.