2.3: Equilibrium, Surpluses, and Price Controls

Voluntary exchange

• Consumer surplus: the difference between what you are willing to pay and what you actually pay
  • CS = buyer’s maximum — price
• Producer surplus: the difference between the price the seller received and how much they were willing to sell it for
  • PS = price — seller’s minimum

Price controls

• Price ceiling: the maximum legal price a seller can charge for a product
  • Goal — make the good affordable by keeping the price from reaching equilibrium
• Price floor: the minimum legal price a seller can charge for a product
  • Goal — keep the price high by keeping the price from falling to equilibrium

Price controls and efficiency

• Excise tax: a per unit tax on producers
  • For every unit made, the producer must pay $ → not a lump sum (one time only) tax
  • Goal — make less of the goods that the government deems dangerous or unwanted
  • Eg. cigarettes + alcohol (”sin tax”), environmentally unsafe products, etc.

International trade

• World price: countries can buy products at their own domestic price or at a cheaper world price
• Tariff: a tax on imports that increases the world price
• Quota: a limit on the number of imports

Purpose of tariffs and quotas

• Protect domestic producers from a cheaper world price
• Prevent domestic unemployment

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