Econ notes Week 4
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This 7 page Class Notes was uploaded by Taryn manciu on Tuesday October 27, 2015. The Class Notes belongs to Econ201 at University of Oregon taught by Keaton Miller in Fall 2015. Since its upload, it has received 38 views.
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Date Created: 10/27/15
Week 4 Tuesday Price Ceiling law forbidding anyone from selling a good for more than the ceiling price Rent controls Price Floor law forbidding anyone from selling a good for less than the oor price Minimum wage All sellers who want to sell are able to sell so we can use the normal rule of calculating area under the Pquots line price producers get and above the supply curve Suppose there are 7 people who want a widget but there are only 3 for sale The goods have to be rationed CS depends on who gets the widgets because they differ in willingness to pay Rationing of goods lead to further inefficiencies How does one ration Figure out willingness to pay Lines First come first serve Networking Opportunity for corruption 1 know a guy whoquot Suppose rationing was perfectly efficient Consumers with highest willingness to pay get to consume goods Suppose rationing was perfectly inefficient Consumers with the lowest willingness to pay get to consume goods Hey I know a guyquot What happens if we allow resales Law in Econland S people cannot sell widget for more than 3 D people allowed to resell at any price black Friday sales with eBay Determine quantity available in market take quantity of quantity demanded and quantity supplied Determine Q Since there are only 3 goods available the supply curve is perfectly inelastic no matter how much people are willing to pay there are only 3 goods to sell Determine supply of goods in resale market Even if a particular D person can buy widget from an S person for 3 the D person needs to consider if it is worth holding on to or reselling Determine demand for goods in resale market Determine equilibrium What does this surplus look like in this market Scalping profit money made when someone buys a qidget for 3 and resells for 7 When resale is possible market forces will ensure that the widgets end up going to those with the highest willingness to pay What happens if D7 buys all the widgets all the scalping profit will go to him If D1 D2 and D3 are the first three to buy in line all the widgets will go to them What is the difference between celling resale and taxes With a price ceiling and resales the red box goes to scalpers for resellers With taxes the red box goes to the government What about laws against price gouging Demand for plywood before after hurricane Free market 3 eg price before 5 eq price after Higher price creates incentive for suppliers to increase quantity Price mechanism ensures people with highest values get it Law against price gouging price ceiling of 3 Don t get increase in quantity like in free market Goods wont always go to people who value it most Some buyers better off pay 3 instead of 5 If price ceilings are so bad why do they exist O NOObU ICDNmtO 012345678910 Suppose a oor price of 7 Excess supply O NOObU39lt mto 012345678910 Minimum wage as a price oor one way to think about labor markets is that we are producers of labor and firms are consumers of labor in this case a minimum wage is a price oor we are not allowed to sell our labor for less than a particular amount effect of a price oor reduce qunatityy number of people emplyoed increase price wages reduce consumer surplus firm profts people who are willing to produce cannot find buyer increase unemployment rate Some arguments in favor of minimum wage increase incentives for unskilled workers to taje jobs as opposed to other options food subsidieswelfare illegal means of obtaining income stimulates consumption since lowincome people spend a higher percentage of their paycheck encourages businesses to remove low skilled work increasing technological development and incenivizing education Supply Mabagment I Econland and Canada 1 o xmmhmouqooco Suppose you want farmers to get 7 for their wages but excess supply when the price is 7 In Us use demand management Subsides Direct purchases Canada uses supply management Government organized cartel to hold back output 0121456L891O What happens in Econland with a quota of 3 Step 1 compare total quota to free market quantity If quota gt free market it doesn t matter and Pquota 0 Here quota 3gt3 Step2 get widget price from demand curve at quota Step 3 set price of quota so marginal producer breaks even taking into account the opportunity cost of quota Total cost production cost quota Marginal production cost at Q 3 is 3 from s curve The opportunity cost of a choice is the value of the best other option When you make a choice to do something you implicitly make the choice not to do several other things Opportunity cost of going to EC 201 at 830 AM is value of sleeping another hour or the opportunity cost of going to Burning Man instead of working for a week is lost salary Week 4 Thursday What happens to surplus under quota policy When we add PS from the milk business to PS from the quota business is higher than the PS in PMilk 5 7 the market 3 5 PQuota 0 4 CS 125 45 Farmers like this policy PSMilk 125 45 PSQuota O 12 PSCombined 1 2 TS 25 21 Total surplus is lower so we have some sort of inefficiency What is the source of the inefficiency What if the quota were not tradable Policy comparison Policy Where green box goes Tax Government Quota Quota owners Price Ceiling Consumers efficient ration unlikely Price Ceiling more Partly destroyed by likely inefficient allocations Price Floor efficient Producers ration unlikely Price Floor more likely Partly destroyed by inefficient allocation Subsidies don t fit because quantity is too high What is an externality An externality arises when a person engages in an activity that in uences the well being of another bystander and neither that effect externalities men we have to differentiate between private and public benefit and costs Examples of externalities Cigarette smoke Second hand smoke affects those in the immediate area Driving cars Climate change from carbon emissions Congestion Suppose you drive on the highway and make 1000 other drivers 6 seconds slower total cost 10 minutes Noise Cell phones Planes Maintence of exterior of ones home Improves perceptions and property values of neighborhood Research Others can imitate or utilize advancements Studying hard for EC201 Most of the benefit is private Maybe some external social benefit of some knowledge spills over to your roommate In the free market efficient quantity is where Private Marginal Benefit Private Marginal Cost Externalities change social costs and benefits Without externalities social cuvees are the same as the private ones When externalities are present external effects must be added If externalities exist output wont be socially efficient Negative externality 9 EC gt 0 Positive externalities 9 EB gt 0 Change Free Market 4 change 3 7 NNN 010101 1 m H N 01 up DJ 01 I I I I 4s 4s O NOObU39ICDVCDLOO 012345678910 Huh N o1 H N Ii m CH E 01 N 01 N H CSPSGS Externality 20 I H N l l S One alternative is a Command and Control approach How about requiring each supplier 885 to cut back and make 6 widgets each instead of 1 Total widgets will be 653 There are real world equivalents of this Fuel efficiency standards on cars mandatory scrubbers on power plants Mandatory cutbacks at each plant Problems with command and control In Econland we don t have efficient production SS is producing while 81 isn t at capacity Should shift production to 1 2 3 for efficiency Problem with fuel efficiency standards Does nothing about existing cars Different standards for different variety of cars No incentive to switch from SUV to small car Cap and Trade is a marketbased method Similar to quota system for dairy in Canada Instead of quotquotaquot we have allowances Green box 12 goes to owners of the allowances suppose SlSS initially allocated 6 allowances S4 and SS sell allowances to 81 82 S3 Total cap 563 Cap and trade has been used in the US to reduce sulfur dioxide emissions from power plants 802 causes acid rainquot Kyoto Protocol is a cap and tradequot system that allows trade across countries Why did the Kyoto Protocol fail a policy dispute between the US and the big developing nations like China and India US argument it wont do any good fro the US and Europe to cute back if it is completely offset by the growth in emissions by China and India Chinese argument yes china produces more carbon than the US but it has four times as many people
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