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This 0 page Class Notes was uploaded by John Om on Monday March 21, 2016. The Class Notes belongs to ECON 102 at Pennsylvania State University taught by Wayne Geerling in Winter 2016. Since its upload, it has received 13 views. For similar materials see Introductory Microeconomic Analysis and Policy in Economcs at Pennsylvania State University.
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Date Created: 03/21/16
Topic 6 Efficiency of Markets Consumer and Producer Surplus Welfare Economics 0 The study of how the allocation of resources affects economic wellbeing Consumer Surplus 0 Difference between willingness to pay for a good amp the price actually paid to get the good Producer Surplus 0 Difference between willingness to sell a good amp the price actually received for that good Consumer Surplus m Willingness to Pay DaVid 170 Ed 120 Frank 70 Price at 143 DaVid is the only one with consumer surplus of 27 Producer Surplus m Willingness to Pay David 40hour Ed 30hour Frank 20hour At price 35 who tutors David and Ed What is the producer surplus 15 5 20 Producer Surplus 71 l Producer Surplus 72 mmm 7 7 W P P Price l Sellers as 775 gt 40 Ed 3 5 40 40 air s30 7 30 to 39 Ed39 2 733m W a 30 39 Frank 520 39 quotquotquot 39 Ed s WTS 20 20 3 39 I 39 20 to 529 Frank l 7 Ld 5 PS 55 F k WV Frank s PS u J i ran 5 as r39 c lt 520 None 0 57 Frank s Pu a 0 39W 315 1 2 3 quot quotD 1 At 325quot for tutoring At 35lhr for tutoring Consumer Surplus amp Producer Surplus Demand curve shows 0 Willingness to pay consumer surplus Supply curve show 0 Willingness to sell producer surplus Total Surplus mi Tn ml Q11 lfare of the society Consumer amp Producer Surplus 73 P cel per gallon m N O O UJgt Supply 250 Demand 0 GE 60 Quanlity millions of gallons of milk The Efficiency Equity Debate In free markets both parties of selfinterested individuals will benefit from trade Benefits might not be equal Efficiency asks 0 Are the gains from trade maximized Is economic welfare maximized Equity asks 0 Are the benefits divided fairly Taxation Welfare amp Deadweight Loss Excise Tax 0 A tax on a specific good e g alcohol tobacco gas 0 Excise taxes 4 of overall tax revenues in the US 0 Tax incidence I Refers to the party consumers or producers who bears the burden of the tax End Result If a tax is levied on a business 0 Firm will attempt to raise price to pass some of the burden to consumers If a tax is leveled on consumers 0 Some of the burden is passed to producers since the market price falls Incidence 0 Whether the tax is levied on the producer or consumer the end incidence result is the same Deadweight Loss On the previous graphs the tax had a price and quantity effect 0 Prices increased 0 Quantity traded decreased Deadweight loss 0 A cost to society in the form of less economic welfare resulting from the tax Caused by the decrease in the amount of trade that is occurring Deadweight Loss 77 quotHrv I Halliquot M milk l w il t uhl lua quotll hump LIV 39 l KI Lu v I39Huvwnhmn plum I 39hm I lh U I39Hc ix H l I39l J l 39U H 1quot1 all Quantny gallons ol milk Tax and Deadweight Loss with inelastic Demand Tax incidence is the same no matter who the tax is leVied on 0 Elasticity of demand and supply can change tax incidence though googVquot Tax and Deadweight Loss with re Tax and Deadweight L Perfectl Inelastic D ange P 55 With V emand 78 1 erfectly E39aSth Demand 78 Price 7 If 3 PTICE Price 539 s P Pl I V If Lu 1 V I u 395 P P V f 951 six my w 39 E L r t 739 31322 m t e 8 36 are e 3 6 Km 0 039 phoneglelmtzlg 0 phonerL arcs clg 39 U T b After the Tax Semng H a Before the Tax b After the Tax Smoking Tax VS Smoking Ban case study Why tax a good if it reduces efficiency in the market by creating DWL Two possible reasons to tax is good 0 Raise tax revenue 0 Decrease productionconsumption How could we decrease smoking most effectively 0 Public smoking bans 0 High cigarette taxes Smoking Tax V Smoking Ban Public smoking bans 0 Cigarette prices remain the same 0 Substitute of Smoking at M available 0 Unintended consequences Cigarette taxes 0 Taxes need to be very high inelastic demand 0 High enough taxes would decrease smoking everywhere and generate large tax revenue Deadweight Low Deadweight Loss amp Tax Revenue no tax r mm I iajdt ax Rhinian J3 c fax my I r 1 I 4 4f f Mmmw un mmlhx 159 Deadw De Eight 19 a adwm h H r x w e V i LUHK f H I I 181 W quot m l 39 i I 3 quot I Kw life 1 l 39 E DWL i Dw mmea i it M 7 l rim 3 h M C u a in t a 5 to Moderate l a z in are Amount of the tax increase Think Pair Share 6000 Price per pound l m Looc mushrootas Diagram 1500 incidence 1500 amp tax revenue 1500 Show workings Can award V credit 375 or 32 750 A 1 Market price rises by Calculate the tax deadweight loss 1500 from 7quot m 88 BU ers pay 13 ofthe 3333 s39XmQLmt producers keep fa 15 by 1 52 from 16 5 Sellers pay 52 ot the 83 6667 B DWL 5 X base 300 x height 5339 C 6 Revenue base 3 X height 700 2100 450