hubbard01_instructorppt04.ppt

Economic Efficiency,GovernmentPrice Setting,and Taxes,2 of 27,After studying this chapter,you should be able to:Understand the concepts of consumer surplus and producer surplus.Understand the concept of economic efficiency,and use a graph to illustrate how economic efficiency is reduced when a market is not in competitive equilibrium.Use demand and supply graphs to analyze the economic impact of price ceilings and price floors.Use demand and supply graphs to analyze the economic impact of taxes.,Should the GovernmentControl Apartment Rents?,LEARNING OBJECTIVES,New York City,About one million of New York Citys two million apartments are subject to rent control.The other one million apartments have their rents determined in the market by the demand and supply for apartments.,3 of 27,Economic Efficiency,Government Price Setting,and Taxes,Price ceiling A legally determined maximum price that sellers may charge.Price floor A legally determined minimum price that sellers may receive.,4 of 27,Consumer Surplus And Producer Surplus,Consumer Surplus,Marginal benefit The additional benefit to a consumer from consuming one more unit of a good or service.Consumer surplus The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.,4-1,5 of 27,Consumer Surplus and Producer Surplus,Consumer Surplus,4-2,6 of 27,The Consumer Surplus fromSatellite Television,How much consumer surplus will the owner of this satellite dish receive?,4-1,7 of 27,Consumer surplus allows us to measure the benefit consumers receive in excess of the price they paid to purchase a product.This figure shows the consumer surplus that households receive from subscribing to broadband Internet service,which is estimated to be$890.5 million per month.,The Consumer Surplus from Broadband Internet Service,YOUR TURN:Test your understanding by doing related problem 1.8 at the end of this chapter.,Distinguish between the concepts of consumer surplus and producer surplus.,4.1 LEARNING OBJECTIVE,8 of 27,Consumer Surplus and Producer Surplus,Producer Surplus,Producer surplus The difference between the lowest price a firm would have been willing to accept and the price it actually receives.,Marginal cost The additional cost to a firm of producing one more unit of a good or service.,4-3,9 of 27,Consumer Surplus and Producer Surplus,What Consumer Surplus and Producer Surplus Measure,Consumer surplus measures the benefit to consumers from participating in a market,and producer surplus measures the benefit to producers from participating in a market.,10 of 27,The Efficiency of Competitive Markets,Marginal Benefit Equals Marginal Cost in Competitive Equilibrium,4-4,11 of 27,The Efficiency of Competitive Markets,Economic Surplus,4-5,12 of 27,The Efficiency of Competitive Markets,Deadweight Loss,4-6,Deadweight loss The reduction in economic surplus resulting from a market not being in competitive equilibrium.,13 of 27,The Efficiency of Competitive Markets,Economic Surplus and Economic Efficiency,Economic efficiency A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production,and where the sum of consumer surplus and producer surplus is at a maximum.,14 of 27,4-7,Government Intervention in the Market:Price Floors And Price Ceilings,Price Floors:The Example of Agricultural Markets,15 of 27,Price Floors in Labor Markets:The Minimum Wage,4-2,Many economists believe there are better policies than the minimum wage for raising the incomes of low-skilled workers.,16 of 27,Government Intervention In The Market:Price Floors And Price Ceilings,Price Ceilings:The Example of Rent Controls,4-8,Dont Confuse“Scarcity”with a“Shortage.”,17 of 27,Government Intervention In The Market:Price Floors And Price Ceilings,Black Markets,Black markets Buying and selling at prices that violate government price regulations.,18 of 27,Whats the Economic Effect of a“Black Market”for Apartments?,4-1,19 of 27,Does Holiday Gift Giving Have a Deadweight Loss?,4-3,Caution:Gift giving may lead to deadweight loss.,20 of 27,Government Intervention In The Market:Price Floors And Price Ceilings,The Results of Government Intervention:Winners,Losers,and InefficiencyWhen the government imposes price floors or price ceilings,three important results occur:,Some people win.Some people lose.There is a loss of economic efficiency.,Positive and Normative Analysis of Price Ceilings and Price FloorsWhether rent controls are desirable or undesirable is a normative question.Whether the gains to the winners more than make up for the losses to the losers and for the decline in economic efficiency is a matter of judgment and not strictly an economic question.,21 of 27,The Economic Impact of Taxes,The Effect of Taxes on Economic Efficiency,22 of 27,The Economic Impact of Taxes,Tax Incidence:Who Actually Pays a Tax?,Tax incidence The actual division of the burden of a tax between buyers and sellers in a market.,23 of 27,The Economic Impact of Taxes,Tax Incidence:Who Actually Pays a Tax?,DETERMINING TAX INCIDENCE ON A DEMAND AND SUPPLY GRAPH,24 of 27,When Do Consumers Pay All of a Sales Tax Increase?,4-2,25 of 27,The Economic Impact Of Taxes,Tax Incidence:Who Actually Pays a Tax?,4-11,DOES IT MATTER WHETHER THE TAX IS ON BUYERS OR SELLERS?,26 of 27,Is the Burden of the Social Security Tax Really Shared Equally between Workers and Firms?,4-4,How much FICA do you think this employee pays?,27 of 27,The Romance of Rent Control,Figure 1:In(a),the elimination of rent control causes an increase from Q1 to Q2 in the quantity of apartments being rented.In(b)this causes the demand for currently non-rent-controlled apartments to shift to the left from D1 to D2.The equilibrium rent declines from$2,000 to$1,500.,28 of 27,Is Rent Control a Lifeline or Stranglehold?,Rent Control Is the Real New York Scandal,AN INSIDE LOOK at Policy,The effect of rent control laws on the supply of affordable apartments.,29 of 27,Black marketConsumer surplusDeadweight lossEconomic efficiencyEconomic surplusMarginal benefit,Marginal costPrice ceilingPrice floorProducer surplusTax incidence,30 of 27,Appendix 4A:Quantitative Demand and Supply Analysis,4A-1,After statistically estimating supply and demand equations,we can use the equations to draw supply and demand curves.,QD=3,000,000 1,000P,QS=450,000+1,300P,QD=QS,Demand and Supply Equations,31 of 27,4A-2,