One mans ceiling is another mans floor

1
One mans ceiling is another mans floor Paul
Simon
2
Efforts by Government to Intervene in Prices
Price Controls Government imposed rules that
prohibit price adjustments to clear prices.
3
Efforts by Government to Intervene in Prices
Price Floors Government sets limit on lowest
possible price Agricultural Price Supports
Dairy, tobacco, corn Minimum Wages Price
Ceilings Government Sets limit on maximum
possible price Rent Control Utility Price
Regulation Usury Laws on Interest Rates
4
Efforts by Government to Intervene in Prices
Price Floors
S
Price
PF
Pe
D
Qe
QD
QS
Quantity
5
Efforts by Government to Intervene in Prices
How can government support price floors?
S
Price
PF
Pe
D
Qe
QD
QS
Quantity
6
Efforts by Government to Intervene in Prices
Deadweight loss from price floor?
S
Price
Consumer Surplus
Lost Consumer and Producer Surplus
PF
Pe
D
Producer Surplus
Qe
QD
QS
Quantity
7
Efforts by Government to Intervene in Prices
Dead weight loss from Government purchases of
excess supply
Govt Pays
PF(QS QD).
S
Price
PF
Pe
D
Govt buy
Qe
QD
QS
Quantity
8
Efforts by Government to Intervene in Prices
Govt Pays
PF(QS QD) using taxes. Does the policy
generate enough value (surplus) to justify ?
Supply
Price
PF
Govt Pays
C
B
A
Pe
J
F
?PS A B C ?CS - A - B ?Govt -B -C -F -H
-I -J ?MV B F H I Net -J
I
H
Demand
Qe
QD
QS
Quantity
9
Efforts by Government to Intervene in Prices
Govt Pays
PF(QS QD) using taxes. Does the policy
generate enough value (surplus) to justify ?
S
Price
Govt Payment beyond surplus and consumer value
generated
PF
Pe
D
Qe
QD
QS
Quantity
10
Net Government Dairy Purchases, 1970-2000 CCC
Commodity Credit Corporation
3,000
18
16
Net Purchases, Million s
2,500
CCC Purchases, Billion Lbs
14
2,000
12
10
Net Expenditures, Million
CCC Purchases, Billion
Lbs Fat Equiv
s
1,500
8
1,000
6
4
500
2
0
0
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
Year
11
Efforts by Government to Intervene in Prices
Loan Deficiency Payments
(PF - Pm )QS
S
Price
PF
Pe
Govt. payment
Pm
D
Qe
QD
QS
Quantity
12
Conclusions

• Effective price floors create excess supply,
• lower total surplus
• raise price above equilibrium
• Only have effects if price floor is above
  equilibrium price

13
Efforts by Government to Intervene in Prices
Price Ceilings rent control
S
Price
Pe
PC
D
QD
Qe
QS
Quantity
14
Efforts by Government to Intervene in Prices
Price Ceilings rent control
S
Price
Winners? Losers?
Pe
PC
D
QD
Qe
QS
Quantity
15
Rent control in New York City
Rent control limits the price a landlord can
charge a tenant for rent, and also regulates the
services the landlord must provide. Failure to
provide these may allow the tenant to demand a
lower rent. About 70 of apartments (1.1 million
units) are covered
When tenant leaves, the unit leaves the program
if there are less than 6 units in the building
16
Rent control started in 1943 to relieve housing
shortage
1921
1996
depression
Since rent control, New York has never recovered
the building level it had in the 1920s
http//prfamerica.org/BehindRentControl.html
17
In 1986, New York City had 12,637 vacant
buildings containing 93,610 housing units. By
1997, the number of vacant buildings stood at
9,483, containing 53,446 units. Who paid for
the renovation?
18
So who pays for new housing in New York?
New York spent 3.7 times more for housing than
the next 50 largest cities combined. On a per
capita basis, New York spent about 102 per
resident on housing, compared with an average of
5.90 in the other cities (Berenyi 1989).
19

• The Americans couldnt destroy Hanoi, but we
  have destroyed Hanoi with very low rents.
• Nguyen Co Thach, Vietnamese foreign minister, 1989

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Conclusions

• Effective price ceilings create excess demand
• lower total surplus
• lower price below equilibrium
• Only have effects if price ceiling is below
  equilibrium price

21
Interventions on quantity supplied

• Licenses restrictions on entry into the market
• occupational licenses
• taxi medallions
• patents
• Quotas restrictions on quantity supplied
• import restrictions

22
Efforts by Government to Intervene in Prices
Price Floors
S
Price
Pm
Pe
D
Licenses
Qe
QL
Quantity
23
Conclusions

• Effective supply restrictions
• raise prices above equilibrium
• lower total surplus
• lower quantity supplied

24
Taxes and Product Markets

• Excise Tax Tax levied on units produced, paid
  by producer
• Sales Tax Tax levied on items sold, paid by
  consumer
• Does who pays the tax affect equilibrium quantity
  or the burden of the tax?
• Are excise taxes shifted to the consumer? Are
  sales taxes shifted to the producer?

25
Taxes and Product Markets

• In Class Handout
• Excise and Sales taxes

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No sales tax
TOTAL SURPLUS
S
Price
Pe
D
Qe
Quantity
27
Sales tax applied
S
Price
PM Tax
PM
D
D with tax
Qe
QD
Quantity
28
Sales tax applied
Lost TOTAL SURPLUS from tax
S
Price
Consumer surplus after tax
Govt Tax revenue
PM
D
Producer surplus after tax
D with tax
Qe
QD
Quantity
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Conclusion

• In general, tax burden is shared between
  consumers and producers
• Impact of excise and sales tax are identical
• Sales taxes lower sales price, so producer
  absorbs some of the tax
• Excise taxes raise the sales price so consumers
  absorb some of the tax
• There is a deadweight loss from taxes

30
Federal Energy Subsidies per Megawatthour in the
United States, 2007
http//www.eia.doe.gov/oiaf/servicerpt/subsidy2/pd
f/execsum.pdf
31
Federal Nonelectricity Related Fuel Subsidies per
Million BTU in the United States, 2007
http//www.eia.doe.gov/oiaf/servicerpt/subsidy2/pd
f/execsum.pdf
32
Do subsidies matter? Tax credit for installed
wind capacity lapsed in 2000, 2002, 2004
The Economist November 16, 2006