Economic Analysis of Price Controls and Taxes

If consumers expect prices to rise (e.g., 3%), businesses may increase prices accordingly, even without cost increases.
This is problematic if price increases are due to taking advantage of consumer expectations rather than legitimate reasons like supply chain issues.

Two options presented to Canadian grocery store CEOs:

This policy threatens taxation if grocery stores are perceived to be overcharging.

Generic supply and demand model for groceries.
Assumption: The market is initially in equilibrium.
Equilibrium exists because grocery stores aim to avoid unsold goods (no leftovers).
Food is perishable and cannot be stockpiled easily.
Producers won't halt production to wait for inventory to deplete.
Exceptions to equilibrium:
- Government intervention (e.g., subsidies on milk).
- Rapid market changes with slow adjustments (e.g., housing prices).
Subsidies for domestic food production (e.g., milk, corn) are often for national security reasons.
- Ensuring domestic supply in case of international crises.
- Example: Semiconductor production concentrated in Taiwan.

Justin Trudeau enforces a price ceiling ($\hat{p}$) below the equilibrium price.
Price ceiling: A maximum price set below the equilibrium, preventing prices from rising higher.
Need to referece different points on the supply and demand lines.
At $\hat{p}$, quantity supplied decreases (producers make less).
Consumers want to buy more at lower prices, increasing demand.
Key observation: Quantity supplied (QS) is the limiting factor because you can't buy what doesn't exist.
Producers may choose to export if domestic prices are too low.

Consumer surplus: Expands due to lower prices but is limited by reduced quantity.
Producer surplus: Decreases due to lower prices.
Deadweight loss: Represents lost surplus because the market is less efficient.
Deadweight Loss Example:
- Equilibrium price = $5.
- Price ceiling = $4.
- A producer can produce groceries for $4.25, and a consumer is willing to pay $5.75.
- Without intervention, they would both benefit.
- With the $4 price ceiling, the producer can't participate, and the consumer doesn't get the groceries.
Total surplus is a measure of market efficiency.
Lowering prices through intervention makes the market worse overall.
Potential increase in consumer surplus comes at the expense of total surplus.

General principle (in Econ 101): Government intervention is typically inefficient.
Exception: Econ 201 may explore situations where government intervention improves the market.
The policy to lower prices may sound good initially but can lead to negative consequences.
The analysis is conditional on the market being in equilibrium and no artificial price increases.
Grocery store margins are often thin (around 1% profit).
Goal: To make groceries cheaper and more affordable.
Price is lower, but there are fewer groceries available.
Analogy: Empty toilet paper shelves during COVID-19.

With reduced supply (e.g., 500 baskets of groceries), the richest or neediest people would be willing to pay a much higher price.
This creates opportunities for black markets.
Individuals may buy groceries at the controlled price and resell them at a higher price.
Analogy: Ticket scalping, Rolex watches on secondary markets.
Lower prices good, lower quantities bad.

Subsidies would shift the supply curve to the right.
Prices go down, and quantities go up.
Challenge: Political unpopularity of subsidizing corporations.
However, it could transfer wealth from higher-income to lower-income households through tax revenue.
Reduce tax on sales (like Trudeau actually did).

The original equilibrium was at a quantity of 30 and a price of 500.
Having a quantity ceiling at 15.
The market is getting cut off a quantity of 15.
Charge the demand price.
The 15 richest people will sell their grades with the higher prices. It's based off the interection with the quantity and the demand curve
The goverment forced 50 grades.
Calculate change surplus.

$Consumer Surplus = \frac{1}{2} \cdot base \cdot height$