The%20Analysis%20of%20Competitive%20Markets

1
Chapter 9

• The Analysis of Competitive Markets

2

Q Rent Control

• Chuncheon City decided to control rent around KNU
  campus for students.
• Are KNU students going to be better off?

3
Consumer and Producer Surplus

1. is the total benefit
   or value that consumers receive beyond what they
   pay for the good.

4
Consumer and Producer Surplus

1. is the total benefit
   or revenue that producers receive beyond what it
   cost to produce a good.

5
Consumer and Producer Surplus
Price
Between 0 and Q0 consumer A receives a net gain
from buying the product-- consumer surplus
Between 0 and Q0 producers receive a net gain
from selling each product-- producer surplus.
Q0
QS
QD
Quantity
6
Consumer and Producer Surplus

• To determine the welfare effect of a governmental
  policy we can measure the gain or loss in
  consumer and producer surplus.

7
Price Control and Surplus Changes
Price
Quantity
8
Price controls and Welfare Effects

• The total loss is equal to area .
• The is the
  inefficiency of the price controls the total
  loss in surplus (consumer plus producer)
• If demand is sufficiently inelastic, losses to
  consumers may be fairly large

9
Price Controls With Inelastic Demand
Price
B
With inelastic demand, triangle B can be larger
than rectangle A and consumers suffer net losses
from price controls.
A
Quantity
10
The Efficiency ofa Competitive Market

• In the evaluation of markets, we often talk about
  whether it reaches economic efficiency
• Policies such as price controls that cause dead
  weight losses in society are said to impose an
  efficiency cost on the economy

11
The Efficiency ofa Competitive Market

• If efficiency is the goal, then you can argue
  leaving markets alone is the answer
• However, sometimes occur

12
Types of Market Failures

• Costs or benefits that do not show up as part of
  the market price (e.g. pollution)
• Costs or benefits are external to the market
• Imperfect information prevents consumers from
  making utility-maximizing decisions.
• Government intervention may be desirable in these
  cases

13
The Efficiency of a Competitive Market

• Other than market failures, unregulated
  competitive markets lead to economic efficiency
• What if the market is constrained to a price
  higher than the economically efficient
  equilibrium price?

14
Price Control and Surplus Changes
Price
Quantity
15
The Efficiency of a Competitive Market

• Deadweight loss triangles, B and C, give a good
  estimate of efficiency cost of policies that
  force price above or below market clearing price.
• Measuring effects of government price controls on
  the economy can be estimated by measuring these
  two triangles

16
Minimum Wages

• Wage is set higher than market clearing wage
• Decreased quantity of workers demanded
• Those workers hired receive higher wages
• Unemployment results since not everyone who wants
  to work at the new wage can

17
The Minimum Wage
w
B
A
L
18
Price Supports

• Much of agricultural policy is based on a system
  of .
• Government can also increase prices through
  restricting production, directly or through
  incentives to producers

19
Price Supports

• What are the impacts on consumers, producers and
  the federal budget?

20
Price Supports

• Government may be able to dump some of the
  goods in the foreign markets
• Total welfare effect of policy
• ?CS ?PS Govt. cost D (Q2-Q1)PS
• Society is worse off over all
• Less costly to simply give farmers the money

21
Price Supports
Price
To maintain a price Ps the government buys
quantity Qg .
B
A
Net Loss to society is E B
Quantity
22
Production Quotas

• The government can also cause the price of a good
  to rise by reducing supply.
• Limitations of taxi medallions in New York City
• Limitation of required liquor licenses for
  restaurants

23
Supply Restrictions
Price
B
A
Quantity
24
Import Quotas and Tariffs

• Many countries use import quotas and tariffs to
  keep the domestic price of a product above world
  levels
• Import quotas Limit on the quantity of a good
  that can be imported
• Tariff Tax on an imported good
• This allows domestic producers to enjoy higher
  profits
• Costs to consumers is high

25
Import Tariff To Eliminate Imports
Price
Quantity
26
The Impact of a Tax or Subsidy

• The government wants to impose a 1.00 tax on
  movies. It can do it two ways
• Make the producers pay 1.00 for each movie
  ticket they sell
• Make consumers pay 1.00 when they buy each movie
• In which option are consumers paying more?

27
The Impact of a Tax or Subsidy

• The burden of a tax (or the benefit of a subsidy)
  falls partly on the consumer and partly on the
  producer.
• How the burden is split between the parties
  depends on the relative elasticities of demand
  and supply.

28
The Effects of a Specific Tax

• For simplicity we will consider a specific tax on
  a good
• For our example, consider a specific tax of t
  per widget sold

29
Incidence of a Specific Tax
Price
B
A
D
Quantity
30
Incidence of a Specific Tax

• In the previous example, the tax was shared
  almost equally by consumers and producers
• If demand is relatively inelastic, however,
  burden of tax will fall mostly on buyers
• If supply is relatively inelastic, the burden of
  tax will fall mostly on sellers

31
Impact of Elasticities on Tax Burdens
Burden on Buyer
Burden on Seller
Price
Price
Quantity
Quantity