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| gains and losses to consumers and products |
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| net loss of total (consumer + producer) surplus |
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| maximization of aggregate consumer and producer surplus |
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situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers
- usually occurs to due to:
1. externalities
2. lack of information |
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| action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price |
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| limit on the quantity of a good that can be imported |
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| tax of a certain amount of money per unit sold |
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payment reducing the buyer's price below the seller's price (i.e. a negative tax)
- benefit of subsidy split between buyers and sellers (opposite of tax) |
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| how consumer and producer surplus used... |
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| to evaluate the gains and losses to consumers and producers of government policies. |
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| when gov imposes a tax or subsidy... |
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- price usually does not rise or fall by the full amount of the tax or subsidy.
- the incidence of tax or subsidy is usually split between producers and consumers.
- fraction that each ends up paying or receiving depends on relative elasticities of supply and demand. |
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| key determinant of who absorbs costs of a tax or subsidy |
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| relative elasticities of supply and demand |
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| why does government intervention usually leads to a dead-weight loss (DWL)? |
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even if consumer surplus and producer surplus are weighted equally, there will be a net loss from government policies that shifts surplus from one group to the other.
-- in some cases, DWL will be small...
-- but others -- price supports and imports quotas -- large |
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Term
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Definition
The difference between the highest price a consumer is willing to pay for a good or a service and the price the consumer actually pays.
*If consumer surplus is/would be negative, then the consumer does no make the purchase.
i.e. Consumer A would pay $10 for a good whose market price is $5 and therefore enjoys a benefit of $5 |
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Producer Surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually recieves.
Marginal Cost is the additional cost to a firm of producing one more unit of a good or service. MC increases as more units are produced. Since MC increases with production, the price at which firms are willing to sell will also increase with production |
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Economic Surplus is the sum of consumer surplus and producer surplus.
ES= CS + PS
How different than tsw? |
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total social welfare?
Economic Efficiency is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and economic surplus is maximized. Economic efficiency happens at equilibrium. This means that the market equilibrium is economically efficient. |
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| assumptions for competitive markets analysis: |
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Definition
1. free entry and exit (π of a perfectly competitive firm = 0
2. no externalities
3. perfect info
4. homogeneity
5 private goods |
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| if improve conditions for someone without harming anyone (almost never) |
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no pareto superior points -- we cannot make anyone better off without harm
e.g. (taxes) |
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| why difficult to measure surpluses? |
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| we usually don't know what people *would* pay |
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consumer surplus + producer surplus
i.e. -- together the measure the welfare benefit of a competitive market |
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measures the total profits of producers, plus rents to factor inputs
*the benefit that lower-cost producers enjoy by selling at the market price. |
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| A market is inefficient if... |
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| more consumer surplus and producer surplus could be obtained. |
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| think about producer surplus |
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| The price of a good has been regulated to be no higher than Pmax, which is below the market-clearing price Po. |
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- causes shortages, since produces make less.
- TSW falls, even though a new "rectangle" is moved to consumer surplus, since some people wont get product at all.
- creates incentive for black markets. |
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| effect of price controls when demand is inelastic |
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Definition
consumers may suffer a net loss (if "triangle" gained is smaller than "triangle lost")
- picking one subset of consumers over another |
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| if price is held above market-clearing level |
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producers will produce more than is needed (since some consumers will not be able to buy -- a shift along demand curve), increasing DWL
- producers could be worse off if triangles disappear |
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drop in employment
- incentives black market labor, or reduced hours |
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| price set by government above free-market level and maintained by government purchases of excess supply |
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| effects of price supports |
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producers gain, consumers lose
forces people to, say, keep farming peanuts while gov destroys peanuts (cash subsidies are better... allow farmers to change crops. or subsidize land..)
cost to government: Ps(Q2 - Q1)
total change in TSW: ∆CS + ∆PS - Cost to Gov |
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to maintain price above market-clearing level, gov can restrict supply either by imposing production quotas (taxi medallions) or by giving producers incentive to reduce output (acreage limitations in agriculture)
- for incentive to work, must be at least as large as the additional planting, given the higher price Ps.
- there is a cost to government |
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- consumers usually lose quite a bit... especially if so high that nothing is imported
- graph is drawn with and without imports |
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tax of a certain amount of money per unit sold
- graph set up with price (Pb) paid by buyers and price (Ps) received by sellers.
- burden usually split by buyers and sellers (though changes with elasticities of supply and demand)
- with tax, producers supply less and and consumers buy less, resulting in deadweight loss |
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| four market-clearing conditions needing to be satisfied after tax in place |
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Definition
(look into these)
1. Qd = Qd(Pb)
2. Qs = Qs(Ps)
3. Qd = Qs
Pb-Ps = t |
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| impact of tax when demand elastic |
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| people will buy substitutes, so firms will eat more of the tax cost |
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| impact of tax when demand inelastic |
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| people cant buy substitutes and have no choice eat tax cost |
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| formulas for unregulated marked: |
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