Mercados

The Analysis of

Competitive Markets

Chapter 9

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Topics to be DiscussedEvaluating the Gains and Losses from Government PoliciesThe Efficiency of a Competitive MarketMinimum Prices Price Supports and Production QuotasImport Quotas and TariffsThe Impact of a Tax or Subsidy

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Consumer and Producer SurplusWhen government controls price, some people are better offMay be able to buy a good at a lower priceBut what is the effect on society as a whole?Is total welfare higher or lower and by how much?A way to measure gains and losses from government policies is needed

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Consumer SurplusThe demand curve shows the willingness to pay for all consumers in the market

Consumer surplus can be measured by the area between the demand curve and the market price

Consumer surplus measures the total net benefit to consumers

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Producer SurplusThe supply curve shows the amount that a producer is willing to take for a certain amount of a good

Producer surplus can be measured by the area between the supply curve and the market price

Producer surplus measures the total net benefit to producers

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Consumer and Producer SurplusBetween 0 and Q0 producers receive a net gain from selling each product--producer surplus.QuantityPriceQ0Between 0 and Q0 consumer A receives a net gain from buying the product-- consumer surplus.QDQS

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Consumer and Producer Surplus

To determine the welfare effect of a governmental policy, we can measure the gain or loss in consumer and producer surplus.

Welfare Effects: Gains and losses to producers and consumers

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Which is the price that maximizesthe total surplus?

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Consumer and Producer SurplusWhen government institutes a price ceiling, the price of a good cant go above that priceWith a binding price ceiling, producers and consumers are affectedHow much they are affected can be determined by measuring changes in consumer and producer surplus

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Price Control and Surplus ChangesQuantityPriceWhen price is regulated to be no lower than Pmin, the deadweight loss given by triangles B and C results.

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The loss to producers is the sum of rectangle A and triangle CConsumers that can buy the good gain APrice Control and Surplus ChangesQuantityPriceConsumers that cannot buy, lose BTriangles B and C are losses to society dead weight loss

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BAWith inelastic demand, triangle B can be larger than rectangle A and consumers suffer net losses from price controls. Price Controls With Inelastic DemandQuantityPrice

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Price Controls and Natural Gas ShortagesFrom example in 1975 Price controls created a shortage of natural gas

What was the effect of those controls?Decreases in surplus and overall loss for societyWe can measure these welfare effects from the demand and supply of natural gas

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BAThe gain to consumers is rectangle A minus triangle B, and the loss to producers is rectangle A plus triangle C.Price Controls and Natural Gas Shortages

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Price Controls and Natural Gas ShortagesMeasuring the Impact of Price Controls in 1975

Change in consumer surplus = A - B = 18 - 0.4 = $17.6 billion Gain

Change in producer surplus= A + C = 18 + 1 = $19.0 billion Loss

Dead Weight Loss= B + C = 0.4 + 1 = $1.4 billion Loss

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The Efficiency of a Competitive MarketIn the evaluation of markets, we often talk about whether it reaches economic efficiencyMaximization of aggregate consumer and producer surplus

Policies such as price controls that cause dead weight losses in society are said to impose an efficiency cost on the economy

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The Efficiency of a Competitive MarketIf efficiency is the goal, then you can argue that leaving markets alone is the answer

However, sometimes market failures occurPrices fail to provide proper signals to consumers and producersLeads to inefficient unregulated competitive market

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Types of Market Failures Externalities Costs or benefits that do not show up as part of the market price (e.g. pollution) Costs or benefits are external to the market

Lack of Information Imperfect information prevents consumers from making utility-maximizing decisions

Government intervention may be desirable in these cases

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The Efficiency of a Competitive Market

Other than market failures, unregulated competitive markets lead to economic efficiency

Some Final Examples and Remarks

Chapter 9

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Minimum WagesWage is set higher than market clearing wage

Decreased quantity of workers demanded

Those workers hired receive higher wages

Unemployment results, since not everyone who wants to work at the new wage can

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BThe deadweight lossis given by triangles B and C.AFirms are not allowed topay less than wmin. Thisresults in unemployment.The Minimum WageLwA is gain to workers who find jobs at higher wage.

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By buying 122million bushels, the governmentincreased the market-clearing price.AB consumer lossABC producer gainThe Wheat Market in 1981QuantityPrice

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The Wheat Market in 1985PriceTo increase theprice to $3.20, thegovernment bought 466 million bushelsand imposeda production quotaof 2,425 bushels.

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The Effects of a Specific Tax

For simplicity we will consider a specific tax on a good

Tax of a particular amount per unit sold

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Buyers lose A + BIncidence of a Specific TaxBDAQuantityPriceGovernment gains A + D in tax revenue.Sellers lose D + CThe deadweightloss is B + C.

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Impact of Elasticities on Tax BurdensQuantityQuantityPricePriceBurden on BuyerBurden on Seller

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The Effects of a Tax or SubsidyA subsidy can be analyzed in much the same way as a taxPayment reducing the buyers price below the sellers priceIt can be treated as a negative taxThe sellers price exceeds the buyers priceQuantity increases

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Effects of a SubsidyQuantityPriceLike a tax, the benefitof a subsidy is splitbetween buyers and sellers, dependingupon the elasticities ofsupply and demand.

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