Chapter 15 Market Interventions Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written.
Post on 23-Dec-2015
221 Views
Preview:
Transcript
chapter 15
Market Interventions
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-2
Learning Objectives
• Describe the effects of a tax or subsidy in a competitive market.
• Explain what determines who bears the burden of tax and the difference between the statutory and economic incidence of the tax.
• Compare the results of price floors, price supports, production quotas, and voluntary production reduction programs.
• Show the effects of a price ceiling.• Define domestic aggregate surplus and determine the
effects of import tariffs and quotas.
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-3
Overview
• Government interventions usually alter market outcomes. We will focus on:– Taxes and subsidies– Policies designed to raise or decrease prices– Import tariffs and quotas
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-4
Taxes
• Governments tax goods to raise the revenue needed to pay public expenditures
• There are different kinds of taxes. We will focus on two:– Specific tax: a fixed dollar amount that must be paid on
each unit bought or sold– Ad valorem tax: a tax that is stated as a percentage on the
good’s price
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Effects of a Specific Tax• Point A shows the
market equilibrium
• Point B shows the increase in the price paid by consumers due to the tax
• Point C shows the decrease in the price received by producers due to the tax
Gallons of gas per month
Pric
e pa
id b
y bu
yers
($/g
allo
n)
D
SP0 + T
S1
P0
Q0
A
Pb
QT
B
PS = Pb - T C
Increase in consumers’ cost per gallon
Decrease in gas stations’ receipts per gallon
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-5
15-6
Incidence of a Specific Tax
• Incidence: how much of the tax burden is borne by various market participants
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Incidence of a Specific Tax• Sellers bear the entire burden of the tax
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-7
Incidence of a Specific Tax• Buyers bear the entire burden of the tax
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-8
15-9
Incidence of a Specific Tax
• The more elastic demand is, and the less elastic supply is, more of the tax is borne by seller
• For small taxes:– ds
s
EE
EshareBuyers
= '
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Effects of a Specific Tax: Shifting the Demand Curve
• Point A shows the market equilibrium
• Point B shows the increase in the consumer’s cost due to the tax
• Point C shows the decrease in the producer’s profit due to the tax
• Regardless of who is taxed by the government, the incidence remains the same
Gallons of gas per month
Pric
e pa
id b
y bu
yers
($/g
allo
n)
D
S
Pb = PS - T
QT
B
P0
Q0
A
PS C
Decrease in gas stations’ receipts per gallon
Increase in consumers’ cost per gallon
P0 + T
DT
T
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-10
Welfare Effects of a Specific Tax
• Deadweight loss of taxation: lost aggregate surplus due to a tax
DWL
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-11
Welfare Effects of a Specific Tax
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-12
15-13
Which Goods should the Government Tax?
• Tax goods for which the deadweight loss of taxation will be low
• Deadweight loss of taxation will be low if either the demand or the supply curve is very inelastic
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Taxation with No Deadweight Loss
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-14
Subsidies
• Subsidy: payment that reduces the amount that buyers pay for a good or increases the amount that sellers receive
• In competitive markets, subsidies create deadweight loss
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-15
15-16
Policies that Raise Prices
• Price floors• Price supports• Production quotas• Voluntary production reduction
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Price Floors
• Price floor: establishes a minimum price that sellers can charge
Quantity traded
Price floor
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-17
Price Supports
• Price support: raises the market price by making purchases of the good, thereby increasing demand
Quantity traded
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-18
Production Quota
• Production quota: imposes limits on the quantity that individual firms can produce
Quantity traded
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-19
Voluntary Production Reductions
• Voluntary production reduction: offers firms inducements to reduce their production voluntarily
Quantity traded
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-20
Policies that Raise Prices and their Welfare Effects
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-21
Policies that Lower Prices
• Price ceiling: establishes a maximum price that sellers can charge
Quantity traded
Price ceiling
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-22
15-23
Tariffs
• Tariff: tax on importsEquilibrium with and without tariff
Tons of sugar per year
Dom
estic
pric
e ($
/ton
)
Sd
ST
D
P0 = PW
Q0dQ0
PT = PW + T
QT
S0
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Welfare Effects of a Tariff
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-24
Quotas
• Quota: limits the total quantity of a good that can be imported
Tons of sugar per year
Dom
estic
pric
e ($
/ton
)
Sd
D
P0 = PW
Q0d0Q
S0
PT = PW + T
QTdTQ
SQ
Quota = (QT - )dTQ
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-25
15-26
Beneficial Trade Barriers
• When the import supply curve is upward sloping, a government can reduce the price received by foreign firms by imposing a tariff.
• Sometimes the domestic benefit from this effect may exceed the deadweight loss created by the tariff, increasing the aggregate domestic surplus
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-27
Review
• The effects of a tax are independent of who is legally required to pay it, whether buyers or sellers.
• The economic incidence of a tax depends on the elasticities of demand and supply. The more elastic demand is and the less elastic supply is, the smaller the share of the tax is borne by consumers.
• Policies designed to raise or lower competitive prices create deadweight loss.
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15-28
Looking Forward
• Until now we have studied markets one at a time. But what are the ripple effects on other markets?
• General equilibrium analysis studies the simultaneous competitive equilibrium in multiple markets, and it will allow us to understand the consequences of interdependence between markets.
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
top related