Applications of Market Equilibrium Analysis

1
Lecture 10
2
Applications of Market Equilibrium Analysis

• Analysis of a per-unit tax
• per-unit or excise taxes impose a fixed
  dollar amount of tax per unit traded
• examples gasoline taxes, cigarette taxes

3
The Impact of a Tax Imposed on Sellers
Price

• Consider the market for used cars where a
  price of 7,000 would bring the quantity of
  used cars demanded into balance with the
  quantity supplied.

• When a 1,000 tax is imposed on the sellers
  of used cars, the supply curve moves up
  vertically by the amount of the tax.

7,400
7,000

• The new price in the market for used cars is
  7,400 . . .

• . . . while sellers receive 6,400 (7,400
  - 1000 tax 6,400).

6,400

• The difference between the two is the amount
  of the tax, 1000.

• As the consumers end up paying 7,400 instead
  of 7,000 and bear 400 of the tax burden.

500
750

• Sellers end up receiving 6,400 and bear 600
  of the tax burden.

Quantity of Used Cars per Month(in thous.)
4
The Impact of a Tax Imposed on Sellers
Price

• Note that the new quantity of used cars that
  make the market is 500.

• As consumers are bearing 400 of the tax
  burden, and as there are 500,000 units being
  sold per month, the tax revenues derived from
  the consumers 200,000,000.

7,400

• As sellers are bearing 600 of the tax
  burden, and as there are 500,000 units being
  sold per month, the tax revenues derived
  from the sellers 300,000,000.

7,000

• As only 500,000 cars are being sold instead
  of the 750,000 from before the tax, the area
  above the old supply curve and below the
  demand curve represents the consumer and
  producer (total) surplus that is lost due to
  the imposition of the tax. This is called
  the Deadweight Loss to Society.

6,400
500
500
750
Quantity of Used Cars per Month(in thous.)
5
The Impact of a Tax Imposed on Buyers

• Consider the market for used cars where a
  price of 7,000 would bring the quantity of
  used cars demanded into balance with the
  quantity supplied.

Price

• When a 1,000 tax is imposed on the buyers of
  used cars, the demand curve moves down
  vertically by the amount of the tax.

7,400
7,000

• While the sellers of used cars now receive
  the new market price for used cars, 6,400 .
  . .

6,400

• . . . buyers pay both the market price and
  the tax, (6,400 1000 tax 7,400).

• The difference between the two is the amount
  of the tax, 1000.

• As the consumers end up paying 7,400 instead
  of 7,000 and bear 400 of the tax burden.

750
500
Quantity of Used Cars per Month(in thous.)

• Sellers end up receiving 6,400 and bear 600
  of the tax burden.

6
The Impact of a Tax Imposed on Buyers
Price

• Note that the new quantity of used cars that
  make the market is 500.

• As consumers are bearing 400 of the tax
  burden, and as there are 500,000 units being
  sold per month, the tax revenues derived from
  the consumers 200,000,000.

7,400

• As sellers are bearing 600 of the tax
  burden, and as there are 500,000 units being
  sold per month, the tax revenues derived
  from the sellers 300,000,000.

7,000

• Again the area above the supply curve and
  below the old demand curve represents the
  consumer and producer (total) surplus that is
  lost due to the imposition of the tax, the
  Deadweight Loss to Society.

6,400

• Note that the incidence of the tax is the
  same regardless of whether it is imposed on
  buyers or sellers.

500
750
500
Quantity of Used Cars per Month(in thous.)
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Changes in Consumer and Producer Surplus from a
Tax
Price
Quantity
8
Tax Burden and Elasticity
Price

• Lets consider the market for Gas and Luxury
  Boots individually.

• We begin in equilibrium.

2.00

• If we were to impose a .90 tax on gasoline
  suppliers, the supply curve moves vertically
  the distance of the tax. Price at the pump
  goes up by .80 and output falls by 1 million
  gal.

S
1.20
1.10
D

• If we were to impose a 25 tax on Luxury Boot
  suppliers, the supply curve moves vertically
  the distance of the tax. Price at the rack
  go up by 5 and output falls by 1.5 thousand
  units.

5
1
2
3
4
7
6
5
6
million(s) of gal. per week
Price

• Note that, as in the graph for the market
  for gas, when the demand curve is relatively
  more inelastic than its supply, that buyers
  bear a larger share of the burden of the tax.

S
105
100

• Note that, as in the graph for the market
  for luxury boots, when the supply curve is
  relatively more inelastic than its demand,
  that sellers bear a larger share of the tax
  burden.

D
80
100
thousand(s) of boots per week
75
50
25
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Applications of Market Equilibrium Analysis

• Restricting prices below equilibrium
• 1984 Organ Transplantation Act
• cant legally buy and sell human organs

10
The Market for Kidneys and Effectsof the 1984
Organ Transplantation Act
Price
40,000
30,000
10,000
Quantity
0
8,000
4,000
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Applications of Market Equilibrium Analysis

• Supply restrictions
• Sugar Quotas
• restrict imports of sugar from outside the U.S.
• The sugar market in 1997
• The world price of sugar has been as low as 4
  cents per pound, while in the U.S. the price has
  been 20-25 cents per pound.
• U.S. production 15.6 billion pounds
• U.S. consumption 21.1 billion pounds
• U.S. price 22 cents/pound
• World price 11 cents/pound

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Sugar Quota in 1997
Price (cents/lb.)
20
16
11
8
4
5
10
15
20
25
0
30
Quantity (billions of pounds)
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Sugar Quota in 1997
Price (cents/lb.)
C
D
B
Rectangle D was the gain to foreign producers who
obtained quota allotments, or 600
million. Triangles B and C represent the
deadweight loss of 800 million.
20
A
16
11
8
4
Qd 24.2
5
10
15
20
25
0
30
Quantity (billions of pounds)
QS 4.0
QS 15.6
Qd 21.1
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EndLecture 10