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CHAPTER 9 OUTLINE
9.1
welfare effects
deadweight loss
If demand is sufficiently
inelastic, triangle B can
be larger than rectangle
A.
In this case, consumers
suffer a net loss from
price controls.
Practice Questions
True or False
I. Workers always benefit from minimum wage laws
II. Even in competitive markets firms have no incentives to control
costs, as they can always pass on cost increases to consumers.
Under a binding price ceiling, what does the change in
consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the
product at the lower price.
B) The loss in surplus for those buyers who previously purchased
some units of the good at the higher price, but these units are no
longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase
the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.
9.2
economic efficiency
Maximization of aggregate consumer and producer surplus.
Market Failure
Conclusion: Economics shows that human organs have economic value that
cannot be ignored, and prohibiting their sale imposes a cost on society that
must be weighed against the benefits.
9.3
Think:
What if producers havent learned
Econ201 and supply Q2 ?
9.4
deadweight loss
Alternative: Incentive
Program
The government can restrict supply
to Q1, by giving producers a financial
incentive to reduce output (e.g.
acreage limitations in agriculture).
For the financial incentive to work, it
must be at least as large as B + C +
D, which would be the additional
profit earned by planting, given the
higher price Ps.
CS = A B
PS = A C + Payments for not producing=(AC)+(B+C+D)=A+B+D
Gov. Cost= - (B + C + D)
TS = - (A + B) + (A + B + D ) (B +C + D) = (B + C)
deadweight loss
When P=3.70
Qg =Excess Supply =Qs-Qd=1800+240P-(3550-266P)= 506P1750= (506)(3.70) 1750 = 122 million
bushels
Loss to consumers= A + B =(3.70-3.46)(2566)+0.5*(2630-2566)(3.70-3.46)=$624million
Cost to the government = $3.70 x 122 million = $451.4 million
Gain to producers = A + B + C = $638 million
Practice Questions
What is the difference between a price support and a price
floor?
A) A price support is below equilibrium; a price floor is above it.
B) A price support is above equilibrium; a price floor is below it.
C) Government buys the excess supply to maintain a price floor,
but not a price support.
D) Government buys the excess supply to maintain a price
support, but not for a price floor.
E) There is no difference between the two.
A small decrease in a production quota will have a large
impact on the support price if:
A) demand is completely elastic.
B) demand is highly (but not completely) elastic.
C) demand is inelastic.
D) The demand elasticity does not affect the price outcomes of a quota
program.
9.6
specific tax
Four conditions:
QD = QD(Pb)
QS = QS(Ps)
QD = Q S
Pb Ps = t
(9.1a)
(9.1b)
(9.1c)
(9.1d)
Incidence of a Tax
S+t
subsidy
(9.2a)
(9.2b)
(9.2c)
(9.2d)
S-subsidy
QD = 150 25Pb
QS = 60 + 20Ps
(Demand)
(Supply)
Practice Questions
The burden of a tax per unit of output will fall heavily on
consumers when demand is relatively ________ and supply is
relatively ________.
A) inelastic; elastic
B) inelastic; inelastic
C) elastic; elastic
D) elastic; inelastic
What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total
welfare declines.
B) Producer and consumer surplus increase, and these gains are
larger than the government cost.
C) Producer and consumer surplus increase, and these gains are
smaller than the government cost.
D) Producer surplus increases, consumer surplus declines, and total
welfare increases due to the subsidy program.