Week 3 lecture notes ECON
Week 3 lecture notes ECON Econ201
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This 5 page Class Notes was uploaded by Taryn manciu on Sunday October 18, 2015. The Class Notes belongs to Econ201 at University of Oregon taught by Keaton Miller in Fall 2015. Since its upload, it has received 52 views.
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Date Created: 10/18/15
Week 3 Tuesday The First Welfare Theorem Determine Efficiency Under efficient allocation of consumption consumers with the largest willingness to pay consume Under efficient allocation of production producers with the lowest cost produce General principal of efficient quantity In any efficient allocation the quantity is such that the marginal valuation of the last unit consumer equals the marginal cost of the last unit produced The First Welfare Theorem The market structure has to be perfect competitive no monopoly or oligopolies no externalities eq if we are buying oilpollution The unregulated market laissezfaire allocation is Pareto Efficient Maximizes the size of the social pie Nothing about equity nothing about who is going to get slice of pie Adam Smith credited with this Theorem Gordon Gekk on Welfare Theorem Is his statement quotgreed is goodquot a correct of the FWT Greed is good is not accurate of FWT quotLeaves of the key assumptions No monopoly or any kind of market power No externalities What about greed That IS FWT though we like to call it quotself interestquot What about good FWT doesn t say good If says markets deliver Pareto efficiency might create situations that are bad or unfair Real world Gordon Gekkos investment bankers traders ect played a large role Social Pie was not maximized houses were built that shouldn t have been Financial system almost collapsed Did FWT get it wrong No externalities one bank brought down the rest of the banks Not an example of a free market Gov was subsidizing bad loans quottoo big to failquot A Incentive is for banks to make crazy loans FWT still holds Securitized loans loans which are packaged ip and sold as securities like stocks on the open market But who was buying these loans Other banks First Bank of Econland Widgtopia Federal Banks Mortgage departments Mortgage departments Investment Department investment department The banks had systemic risk The all banks are doing business together buying selling with each other loans to each other Every bank was at risk and were about to collapse Externalities are important arises when a person engages in an activity that in uences the well being of a bystander and neither pays nor receives any compensation for that effect Housing crisis many kinds of externalities at work banks that had limited direct exposure to housing market had exposure through counterparties and benchmark interest rates Turns government can be good at dealing with externalities To see this will analyze government policies without externalities first and then add them later Week 3 Thursday Taxes is a wedge between the price a consumer pays and the price the producer receives Pquotd tax PAS price that the demand person pays for a good is equal to the price a supplier pays plus tax Find equilibrium under tax find quantity where distance between demand and supply equals the tax Opposite of tax PAS PAd subsidy The burden incidence of the tax depends on elasticity The less elastic the side of the market you are on the more of the tax you pay If you are more inelastic you are more inelastic price doesn t affect your behavior as much as the other side When tax comes in easier for you to deal with it than the other side OANCDLO ICDNOOLOO 012345678910 quotfind tax on left side OANCDLO ICDNOOLOO 012345678910 Perfect Elasticity Supply OANOJLO ICDVOOQ 012345678910 1 OANOJLO ICDVOOQ 012345678910 quotfind subsidy on right side Perfect Inelastic Supply Taxes and Subsidy are movement along the S and D curve and therefore they do not shift the S and D curve When the government is contributing money that is a considered a subsidy Welfare No tax 4 tax Change amylases Q 5 3 2 P s 5 3 2 PAd 5 7 2 Consumer 125 45 8 Surplus PS 125 45 8 Gov t 0 12 12 Surplus Total 25 2 1 4 Surplus Dead weight loss DWL is 4 What is the source of the inefficiency Problem breakdown of efficient Quantity Principal Marginal reservation price marginal cost Q 3 is too small Other general principals continue to hold efficient allocation of consumption and production How else could the government raise money Alternative 1 Head Tax Charge of 060 per person 20 people in economy total revenue is 12 No deadweight loss from widget tax No distortion of behavior Example England 1377 Every one of 14 had to pay a groat to the crown to finance a war with France Head tax is a regressive tax Lowincome people are taxed higher percentages of their income than highincome people High income people are taxed higher percentage of their income than low income people is called Progressive tax Alternative 2 Tax of 2 for people with the last name lt3 Sl SZ 53 D1 D2 D3 pay tax Total revenue 12 Pareto improvement compared to 4 widget tax Widget market functions normally and generates 25 in total surplus 12 of that surplus is transferred from producers and consumer to government Government revenue is still included in total surplus Total surplus is still 2 5 and 8183 D1D3 are no worse off Taxing Principal Taxes that distort decisionmaking reduce the size of the social pie compared to taxes that don t distort decisions What kind of tax doesn t distort decisionmaking Levies for schools levies for schools are paid for by property taxes people have to consider property taxes when buying a house to consider if they can afford it or not thus this will distort decision making Taxes in Actual Land Biggest distortions come from two types of decisions Labor L Capital K To raise money for government spending we go after L and K What does that mean L and K are reduced Deadweight loss
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