《英文版微观经济学复习提纲Chapter 5. Economic efficiency, government price setting and taxes.pdf》由会员分享，可在线阅读，更多相关《英文版微观经济学复习提纲Chapter 5. Economic efficiency, government price setting and taxes.pdf（19页珍藏版）》请在三一文库上搜索。
1、5 Economic Efficiency, Government Price Setting, and Taxes Chapter Summary Although rent controls no longer in Australia, many governments around the world, such as Malaysia and the U.S., have placed ceilings on the maximum rent some landlords can charge for some apartments and houses. Governments a
2、lso impose taxes in some markets. To understand the economic impact of government in markets it is necessary to understand consumer surplus and producer surplus. Consumer surplus is the dollar benefit consumers receive from buying goods and services at market prices less than the maximum prices they
3、 would be willing to pay. Producer surplus is the dollar benefit producers receive from selling goods and services at prices greater than the minimum prices they would be willing to accept. In a competitive market with no externalities the equilibrium price for a good or service occurs where the mar
4、ginal cost of the last unit produced and sold is equal to the marginal benefit consumers receive from the last unit bought. At this same level of output, economic surplus, the sum of consumer and producer surplus, is maximized. Although price controls on rent no longer exist in Australia, there are
5、many other examples of the government setting prices, such as the minimum wage in labour markets (a “floor price”). Compared to the competitive equilibrium, price ceilings and price floors reduce economic efficiency. A tax on the sale of a good or service also reduces economic efficiency. The burden
6、 of a tax (or tax incidence) is the degree to which consumers or producers actually pay the tax. The incidence of a tax depends on how responsive producers and consumers are to the price change caused by the tax. Learning Objectives When you finish this chapter you should be able to: 1 Understand th
7、e concepts of consumer surplus and producer surplus. Consumer surplus is the benefit consumers receive from paying a price lower than the maximum price they would be willing to pay. Producer surplus is the benefit a firm receives from selling a good or a service at a price higher than the minimum th
8、e firm would be willing to accept. Economic surplus is the sum of consumer surplus plus producer surplus. 2 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. An economically efficient outco
9、me occurs when a competitive market equilibrium is reached. Maximum economic efficiency results when the marginal benefit received by consumers from the last unit bought equals the marginal Economic efficiency, government price setting and taxes 66 cost to producers from selling the unit. Equilibriu
10、m in a competitive market results in the economically efficient output, where marginal benefit equals marginal cost. 3 Use demand and supply graphs to analyse the economic impact of price ceiling and floors. Though total economic surplus is maximised when a competitive market equilibrium is reached,
11、 individual consumers would rather pay a price lower than the equilibrium price and individual producers would rather charge a higher price. Producers or consumers who are dissatisfied with the equilibrium price can lobby government to legally require a different price. When the government intervene
12、s it can aid sellers by requiring a price above equilibrium (a price floor) or it can aid consumers by requiring a price below equilibrium (a price ceiling). Price floors and ceilings reduce economic efficiency. 4 Use demand and supply graphs to analyse the economic impact of taxes. Whenever a gover
13、nment places a tax on a good or service, economic efficiency is reduced. Some of the reduction in economic surplus due to the tax becomes revenue for the government while the rest of the reduction is a deadweight loss, a net reduction in economic surplus that is not transferred to government or anyo
14、ne. Chapter Review Consumer Surplus and Producer Surplus Consumer surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. Producer surplus is the difference between the lowest price a firm would be willing to accept and the price it
15、actually receives. Consumer and producer surplus represent the benefits consumers and producers receive from buying and selling a good or service in a market. Marginal benefit is the benefit from consuming one more unit of a good or service. The height of a market demand curve at a given quantity me
16、asures the marginal benefit to someone from consuming that quantity. Consumer surplus refers to the difference between this marginal benefit and the market price the consumer pays. Total consumer surplus is the difference between marginal benefit and price for all quantities bought by consumers. Tot
17、al consumer surplus is equal to the area below the demand curve and above the market price. Marginal cost is the additional cost to a firm of producing one more unit of a good or service. The height of a market supply curve at a given quantity measures the marginal cost of this quantity. Producer su
18、rplus refers to the difference between this marginal cost and the market price the producer receives. Total producer surplus equals the area above the supply curve and below price for all quantities sold. ? Helpful Study Hint You probably have bought something you thought was a bargain. If you did,
19、the difference between what you would have been willing to pay and what you did pay was your consumer surplus. Consumers differ in the value they place on the same item but typically pay the same price for the item. Those who value the item most receive the most consumer surplus. Since the marginal
20、cost of producing a product rises as more is produced, and price will equal marginal cost for the last unit of output produced and sold in a competitive market, price must be greater than the marginal cost of all other units of output. Be sure that you understand Figures 5.2 and 5.3 (pages 131 and 1
21、33 respectively) and the explanation of these figures in the textbook. 67 Chapter 5 The Efficiency of Competitive Markets When equilibrium is reached in a competitive market the marginal benefit equals the marginal cost of the last unit sold. This is an economically efficient outcome. If less than t
22、he equilibrium output were produced, the marginal benefit of the last unit bought would exceed the marginal cost. If more than equilibrium quantity were produced, the marginal benefit of this last unit would be less than its marginal cost. Economic surplus is the sum of consumer and producer surplus
23、. A deadweight loss is the reduction in economic surplus that results when a market is not in competitive equilibrium. 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 where the sum of consume
24、r and producer surplus is at a maximum. ? Helpful Study Hint Figure 5.6 (pages 136) illustrates the deadweight loss from production at a non-equilibrium point in a competitive market. You should understand that when the quantity of chai tea cups is sold is 14,000 instead of 15,000 there is a loss of
25、 both producer and consumer surplus. Government Intervention in the Market: Price Floors and Price Ceilings Though the total benefit to society is maximized at a competitive market equilibrium, individual consumers would be better off if they could pay a lower than equilibrium price and individual p
26、roducers would be better off if they could sell at a higher than equilibrium price. Consumers and producers sometimes lobby government to legally require a market price different from the equilibrium price. A price floor is a legally determined minimum price that sellers may receive. A price floor e
27、ncourages producers to produce more output than consumers want to buy at the floor price. The surplus (equal to the quantity supplied minus the quantity demanded) at the floor price is often bought by the government. The government may also pay farmers to take some land out of cultivation. The margi
28、nal cost of production exceeds the marginal benefit and there is a deadweight loss which reflects a decline in efficiency due to the price floor. For example, the Australian government for many years imposed price floors on many agricultural products, including wool. For wool, the resultant stockpil
29、e that the government had to buy at this inflated price took many years to clear. A price ceiling is a legally determined maximum price that sellers may charge. Price ceilings are meant to help consumers who lobby for a price ceiling after a sharp increase in the price of an item on which they spend
30、 a significant amount of their budgets (for example, rent and petrol). At the ceiling price the quantity demanded is greater than the quantity supplied so that the marginal benefit of the last item sold (the quantity supplied) exceeds the marginal cost of producing it. Price ceilings result in a dea
31、dweight loss and a reduction of economic efficiency. Price ceilings create incentives for black markets. A black market refers to buying and selling at prices that violate government price regulations. Economic efficiency, government price setting and taxes 68 ? Helpful Study Hint An interesting que
32、stion to consider is why politicians in some countries maintain agricultural price supports, despite the significant costs paid by their constituents for these programs. Since each individual incurs a small fraction of the total cost, it is hardly worth the trouble to register a complaint to these p
33、oliticians. However, the benefits of price floors are concentrated among a few producers who have a strong incentive to lobby for the continuation of these price supports. Politicians act rationally by ignoring the interests of those who pay for these programs. With respect to price ceilings, you ma
34、y be swayed by the argument that it is justified because its intent is to help low income consumers afford these products. Though some low income consumers may be among those who buy the product, there is no guarantee of this. Suppose you were a landlord who owned a flat that is subject to rent cont
35、rol. As a result of this low price for the flat there are five potential tenants for the one flat. They include a male university student, a school teacher with a pet dog, a low income retail worker with a spouse and two children, a doctor and a lawyer. Which one would you choose? The Economic Impac
36、t of Taxes Government taxes on goods and services reduce the quantity produced. A tax imposed on producers of a product will shift the supply curve up by the amount of the tax. Consumers pay a higher price for the product and there will be a loss of consumer surplus. Because the price producers rece
37、ive after the tax is paid falls there is also a loss of producer surplus. There is also a deadweight loss because of the tax. Whether a tax is levied on consumers or producers does not affect the tax incidence. Tax incidence is the actual division of the burden of the tax between buyers and sellers.
38、 Tax incidence is determined by the degree to which the market price rises as a result of a tax. This, in turn, is determined by the willingness of suppliers to change the quantity of the good or service they offer and the willingness of consumers to change their quantity demanded as a result of the
39、 tax. Appendix: Quantitative Demand and Supply Analysis Quantitative analysis supplements the use of demand and supply curves with equations. An example of the demand and supply for apartments in a city is Q S = - 450,000 + 1,300P Q D = 3,000,000 1,000P Q D and Q S are the quantity demanded and quan
40、tity supplied of apartments per month, respectively. At the competitive market equilibrium quantity demanded equals quantity supplied: Q D = QS or 3,000,000 1,000P = - 450,000 + 1,300P 69 Chapter 5 Rearranging terms and solving for P yields the price at which quantity demanded equals the quantity su
41、pplied. This is the equilibrium price. 3,450,000 P=$1,500 2,300 Substituting the equilibrium price into the equation for either demand or supply yields the equilibrium quantity. Q D = 3,000,000 1,000P = 3,000,000 1,000(1,500) = 1,500,000 Q S = - 450,000 + 1,300P = - 450,000 + 1,300 (1,500) = 1,500,0
42、00 The demand equation can be used to determine the price at which the quantity demanded is zero. Q D = 0 = 3,000,000 1,000P 3,000,000 P=$3,000 1,000 The supply equation can be used to determine the price at which the quantity supplied equals zero. Q S = 0 = - 450,000 + 1,300P -4,500,000 P=$346.15 1
43、,300 ? Helpful Study Hint The equations highlight an oddity of demand and supply analysis. The dependent variable in most graphs is the “Y variable,” or the variable measured along the vertical axis, while the independent or “X variable” is measured along the horizontal axis. Economists assume that
44、price changes cause changes in quantity so the dependent variable appears on the left hand side of the demand and supply equations. In turn, the coefficient of the price terms in these equations equals the change in quantity divided by a one unit change in price (Q/P). But price appears on the verti
45、cal axis and quantity on the horizontal axis in demand and supply diagrams Economic efficiency, government price setting and taxes 70 Calculating Consumer Surplus and Producer Surplus Demand and supply equations can be used to measure consumer and producer surplus. Figure 5A.1 (page 156) uses a grap
46、h to illustrate demand and supply. Because the demand curve is linear, consumer surplus is equal to the area of the blue triangle in Figure 5A.1. The area of a triangle is multiplied by the base of the triangle multiplied by the height of the triangle, or x (1,500,000) x (3000 1,500) = $1,125,000,00
47、0. Producer surplus is calculated in a similar way. Producer surplus is equal to the area above the supply curve and below the line representing market price. The supply curve is a straight line, so produce surplus equals the area of the right triangle: x (1,500,000) x (1,500 346) = $865,500,000 Pro
48、ducers surplus in the market for rental apartments is therefore about $865 million. We can use this same type of analysis to measure the impact of rent control on consumer surplus, producer surplus and economic efficiency. For instance, suppose the city imposes a rent ceiling of $1000 per month. Fig
49、ure 5A.2 can help guide us as we measure the impact. First, we can calculate the quantity of apartments that will actually be rented by substituting the rent ceiling of $1000 into the supply equation: QS = 450,000 + (1,300 1,000) = 850,000 We also need to know the price on the demand curve when the quantity of apartments is 850,000.We can do this by substituting 850,000 for quantity in the demand equation and solving for price: 850,000 = 3,000,000 1,000P