Intro to Food and Resource Economics - Week 6
Intro to Food and Resource Economics - Week 6 2713
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This 27 page Class Notes was uploaded by Taylor Baker on Thursday September 22, 2016. The Class Notes belongs to 2713 at Mississippi State University taught by Danny Barefield in Fall 2016. Since its upload, it has received 35 views. For similar materials see Intro to Food & Resource Econ in agricultural economics at Mississippi State University.
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Date Created: 09/22/16
Intro to Food and Resource Economics Week 6: September 19 - 23, 2016 Chapter 6: Government Policies that Alter Private Market Outcomes Going to Discuss three government policies that interfere with the market in this chapter: • controls ▪ 1. Price ceiling – a legal (government sets it) maximum on the price of a good or service ▪ 2. Price floor – a legal (set by the government) minimum on the price of a good or service • 3. Taxes ▪ The government can make either buyers or sellers pay a specific amount on each unit (commonly called an excise tax) - The supply/demand model can show how each type of policy affects the market outcome (the price that buyers pay, the price that sellers receive, and the equilibrium quantity The market for Apartments: - equilibrium without price controls How Price ceilings affect market outcomes: - if the price ceiling is above the equilibrium price, then there is no effect on the market - a ceiling keeps stuff below it. and to get to the ceiling you have to rise - for the below graph, if the government puts a ceiling on a two bedroom apartment for $1000, the landlord can’t charge the tenant more than $1000 - the tenant will only pay $800 because that is equilibrium - if the government puts a ceiling on a good that is higher than the equilibrium then it is useless because you'll only pay equilibrium. How price ceilings affect market outcomes: - If the price ceiling is below the equilibrium price, then the equilibrium price is illegal and producers can’t charge that price. - This leads to a shortage of apartments. - for a ceiling to be affective it has to be placed below the equilibrium. Shortage and Rationing - With a shortage, sellers must ration the goods among buyers • Rationing mechanisms ▪ Long lines (queues) Discrimination according to sellers’ biases ▪ • These mechanisms are often unfair and inefficient. The goods do not necessarily go to the buyers who value them most highly. • When prices are not controlled, the rationing mechanism is efficient and impersonal (deals with fairness) The Market for Unskilled Labor - equilibrium without price control (a minimum wage) - the government says you have to get paid at least minimum wage - Price Floors mean you can’t go below it, you can’t go below the floor How Price Floors affect Market Outcomes - If the price floor is set below the equilibrium price, it is not binding and there is no affect on the market outcome. - If the price floor is set above the equilibrium price, it is binding and the equilibrium price is illegal. The floor causes a surplus (“unnecessary” unemployment). - for a price floor to be affective it has to be set above equilibrium - Minimum wage regulations do not affect workers working at jobs that require high skills. They do affect young, unskilled workers the most. It’s been estimated that a 10% increase in the minimum wage increases teen unemployment by 1%-3% - In the long run, both supply and demand are more elastic than in the short run. This causes the labor surplus to be even larger. Taxes: • The government levies taxes on goods and services to raise revenue to pay for national and local defense, public schools, etc. • The government can make either buyers or sellers pay the tax. Two types of taxes • ▪ The tax can be a percentage of the good’s price (sales tax) ▪ The tax can be a specific amount for each unit sold (excise tax) (example: property tax, motor oil) • For simplicity, we will only analyze the per-unit tax Market for Gasoline: (IMPORTANT) - equilibrium without a tax G - it doesn't matter who pays the tax it only matters how much - the tax affects both the buyer and the seller - the state of MS imposes an additional $0.60 per gallon tax on gasoline to maintain roads and bridges to be paid by customers. (CONSUMERS = DEMAND = SHIFT DOWN; CONSUMERS AFFECT THE DEMAND CURVE) - Step 1: Determine the vertical distance of the tax below the equilibrium point a - Step 2: (assuming tax will be paid by the buyer) shift the demand curve to account for the tax SHIFT DOWN r - Rationale: Price would have to fall by the amount of the tax in order to make buyers willing to buy the same quantity as before. - Step 3: determine the new equilibrium quantity at the intersection of S1 and D2(80). - Step 4: then determine that price at that “equilibrium” (the amount that the supplier/sellers are paying) G THE LINE INSIDE THE CIRCLE REPRESENTS THE SELLERS PRICE TAX - D2 is a tool it is not a demand shift - Step 5: Extend the dashed vertical quantity line to the original demand curve D1 (remember that the vertical distance between D1 and D2 is the price of tax) and determine the price from demand curve D1. ESSENTIALLY THE $1.40 IS THE WHOLESALE PRICE THAT THE SELLER PAID TO GET THE PRODUCT AND THE $2.00 IS THE RETAIL PRICE THAT THE SELLER CHARGES TO ACCOUNT FOR TAX - New Equilibrium - Quantity = 80 - Sellers receive - P = $1.40 - S Buyers pay - PB = $2.00 - Difference between what sellers receive and buyers pay - Tax = $0.60 Tax Incidence: - Incidence shows how the burden of the tax is shared among market participants - In this example: - Buyers pay $0.35 more - Sellers get $0.25 less Market For Gasoline: New Problem Paid by the Producers - Equilibrium without a tax - The State of Mississippi imposes an additional $0.60 per gallon tax on gasoline to maintain roads and bridges to be paid by producers. - Step 1: Determine the vertical distance of the tax above the equilibrium point. - Step 2: Shift the supply curve in to account for the tax. - Rationale: Price would have to rise by the amount of the tax in order to make producers willing to sell the same quantity as before. - Step 3: Determine the new equilibrium quantity at the intersection of D and S (80). 1 2 - Step 4: Then determine the price at that equilibrium. This will be the price that buyers pay (P ). B - Step 5: Determine the price when the new quantity line crosses the original supply curve S (remember that the vertical 1 distance between S1 and S2 is the price of the tax). This is the price that the sellers will receive for the new quantity. - New Equilibrium - Quantity = 80 - Sellers Receive - Ps = $1.40 - Buyers pay - P = $2.00 B - Difference between what sellers receive and buyers pay - Tax = $0.60 Analyzing the effects of an excise tax: • Whether the government makes the buyers or the sellers pay the tax, all effects are the same ▪ The price that the buyers pay rises to $2.00 per gallon ▪ The price that the sellers receive falls to $1.40 per gallon ▪ The buyer vs. seller tax incidence is the same for both scenarios o Buyers pay $0.35 of the tax o Sellers pay $0.25 of the tax Elasticity and tax incidence: - supply is more elastic than demand - It’s easier for sellers to leave the market than it is for buyers. - Buyers bear most of the tax burden or incidence - demand is more elastic than supplyIt’s easier for buyers to leave the market than it is for sellers. - Sellers bear most of the tax burden or incidence. if supply is more inelastic than demand then sellers pay more of the tax incidence if demand is more inelastic than supply buyers pay the tax incidence Chapter 7: Welfare economics: - Recall that the allocation of resources refers to: How much of each good is produced ▪ ▪ Which producers produce it ▪ Which consumers consume it • Welfare economics studies how the allocation of resources affects economic well-being of both consumers and producers • First, we look at the well-being of consumers Willingness to Pay (WTP) -A buyer’s willingness to pay for a good is the maximum amount that the buyer will pay for that good. • WTP measures how much the buyer values the good. -Example: Four buyers’ WTP for an iPod Buyer WTP Anthony $250 Chad $175 Hannah $300 John $125 WTP and the Demand Curve -Question: If the price of an iPod is $200, how will buy an iPod and what is the quantity demanded? -Answer: Hannah and Anthony will buy aBuyerd WTP Chad and John will not QD = 2 Anthony $250 When P = $200 Chad $175 Hannah $300 John $125 Derive the demand schedule: Buyer WTP P (price of Anthony $250 iPod) Who Buys QD Chad $175 $301& up Nobody 0 $251 - $300 Hannah 1 Hannah $300 $176 - $250 Anthony, Hannah 2 John $125 $126 - $175 Chad, Anthony, 3 Hannah $0- $125 John, Chad, 4 Anthony, Hannah For any quantity, the height of the demand curve is the WTP of the marginal buyer, the buyer who would leave the market if the price were any higher. Consumer Surplus: - Consumer Surplus is the amount that a buyer is willing to pay minus the amount that the buyer actually pays: - Suppose Price = $260 - Hannah’s Consumer Surplus = $300 - $260 = $40 Buyer WTP - The others have no consumer surplusAnthony $250 because they do not buy an iPod at this price Chad $175 - Total Consumer Surplus = $40 Hannah $300 John $125 Consumer Surplus and the demand curve: - Suppose Price = $260 - Hannah’s Consumer Surplus = $300 - $260 = $40 - Total Consumer Surplus = $40 - Suppose Price = $220 - Hannah’s Consumer Surplus = $300 - $220 = $80 - Anthony’s Consumer Surplus = $250 - $220 = $30 - Total Consumer Surplus = $110 The total Consumer Surplus the area under the demand curve above the Price and from 0 to Qd Consumer Surplus with many Buyers and a Smooth Demand Curve - At Quantity = 5,000, the marginal buyer is willing to pay $50 for a pair of shoes - Suppose Price = $30 - Then his consumer surplus is $20 ($50 - $30) - Consumer Surplus is the area between Price and the Demand curve from 0 to the Quantity - Recall that the area of a right triangle equals ½ x base x height - Height = $60 - $30 = $30 - Base = 15,000 - 0 = 15,000 - Consumer Surplus = ½ x 15,000 x $30 = $225,000 How a higher price reduces consumer surplus - if price rises to $40 - Consumer Surplus = ½ x 10,000 x $20 = $100,000 - There are two reasons for this fall in consumer surplus Cost and the Supply Curve - Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost) Includes the cost of all resources used to produce the good, including the value of the seller’s time Example: Costs of three sellers in the lawn cutting business. - A seller will produce and sell the good/service only if the price meets or exceeds his/her cost. - Hence, cost is a willingness to sell. Name Cost Jack $10 Janet $20 Chrissy $35 Derive the supply schedule from the cost data Name Cost Price Q S Jack $10 $0 - $9 0 Janet $20 $10 - $19 1 Chrissy $35 $20 - $34 2 $35 & up 3 Producer Surplus = Price - cost - Producer Surplus: The amount a seller is paid for a good minus the seller’s cost Producer Surplus = Price - cost - If Price = $25 Jack’s Producer Surplus = $15 Janet’s Producer Surplus = $5 Chrissy’s Producer Surplus = $0 Total Producer Surplus = $20 Producer Surplus with many Buyers and a Smooth Supply Curve - Producer Surplus is the area between Price and the Supply curve from 0 to the Quantity - Recall that the area of a right triangle equals ½ x base x height - Height = $30 - $0 = $30 - Base = 15,000 - 0 = 15,000 - Producer Surplus = ½ x 15,000 x $30 = $225,000 How a Lower Price Reduces Producer Surplus - if price falls to $40 - Producer Surplus = ½ x 10,000 x $20 = $100,000 - There are two reasons for this fall in producer surplus G
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