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