L6 Government policies
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
Price Ceilings: Rent Controls
Price Floors: Minimum Wage
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
Ability to describe market effects of price ceilings and floors.
Explain burden distribution associated with indirect taxes.
Illustrate supply and demand diagrams illustrating these economic principles.