The Analysis of Competitive Markets

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»۱۲ ‏عصردب)‎ oF

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لحعجصمح() عا با ‎Vopios‏ ® Guchotoy the Gatos ud bosses Prox Governed Polivies--Orusuver od Producer Gurplus ® Dke GPRRiciewy ve uo Cowpetiive Market # Oi Proves 9 Oke S

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لحعجصمح() عا با ‎Vopios‏ " Grice Supports un Production Quotes " ‏سیب‎ Quotes urd DarPPs © Dke Ieopart oP a Dax or Gubsidy 9 Oke SD

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Guduatay the Gatos ond bosses Prow Coveravedt Prictes--Oowuver und Producer Gurphs # Review © Cocsunver surplus ts the total beoePit or value thot ‏مهو‎ receive bepood what they pay Por the xpod. © Producer surplus is the total beoePit or reves that producers reveive bepood whet it ost 17 ۱ pooduve u ypod. ‏سب‎ 8 Oke

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Gudhratay he Guts ond bosses Prow Governed ‏لو یحو کیان‎ Producer Gurphs م خا ونح جمس سر ‎the‏ ول و "ل ‎qovennvedd policy we co weosure the qos‏ # DePare GPP ets © Goies ond losses voused by wovernnvedt faterveciivd to the warket. 9 Oke Oo

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Chern to Consurver od @rocducer Gurphs Prow Price ‏انز‎ © Observetiog: ‏و‎ Vhe tot loss is equ ty wed D+ OC. © Phe total chore io ‏دوس‎ > (®-@®) + (-B-C)=-8-C © The deadweiht loss is the toePPiniewsp oP the Prive cous or the loss oP the producer surplus 9 Oke O

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هوجو ‎to‏ وجمان انز ‎@rocducer Gurphs Prow Price‏ ® Observation © Comsuvers con Pxperieuce 0 oet loss tt ۱ 9 Oke SO

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rice Ovurols und Oxturd Gus Shortness ۲" ‏عم كل‎ Prive vowels peeuted a shortage oF ‏كي نون‎ © Okt wus the deadweight lass? 9 Olde 0

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rice Ovurols und Oxturd Gus Shortness QOxta Por (ORS «۰ ‏:ریق‎ 06 - 46 + 6 6, + 0.66 ۰ ‏بسا ات بت ها تایه مین‎ )۱۰۴( و 5۵ + 6 - و لسن ۰ رض امح ‎Orca‏ © 50 ree oh reel eo ni or eho price oF vil ia $/b. 9 Oke IC

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لجه اون ‎rice‏ ‏جصد ۳ ۶۶) ایو( ۰۲7 COTS: =P, =$0hb ® Ggulbrine Cr = $Shok ud Q = CO oe ‎Price veting set ot $0‏ "ا ‎coo be seed yrcophicdhy:‏ موجن وب "ا ‎Oke 09‏ وه ‎ ‎ ‎ ‎

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Pree (Shoe?) © ‏و‎ ‎1119 ‏دا لجح نا دفي‎ ‏طحم سحاد © ام‎ ‏و ل وم‎ wal he bor { packers & eect 0 6 ‏طسب سار‎ 0 6,00] - ‏اس سب سس مب‎ ۳ 7 ۱/۱ ۱/۰ @ ۱/ ۱ if ۱/۱ / ‏اد ممه كمه وموم‎ i ۱ ۱ 1 0 8 @ 19 1990 66 BO Aw (TH) ‏وه‎ ۵»

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rice Ovurols und ‏یه(‎ Bus Shortness ® Qeasuntay the Isppact oP Price Controls © 1 ‏ما‎ woo ۰1 0 20, ‏مسا‎ ۲ 20 #10 = S@, +9.°S(0)] © ۵ - )06 ‏(سب مسا‎ )30/بسج(‎ = $C bho ‏(سب .۲ 3) * (0/9) - ۵ ه‎ x ($O.POla#) = $O.F ‏مسلط‎ ‎© O= (WS) x (Gb cock) x (G@iecch) = $0) boa

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rice Ovurols und Onturd Gus Ghorieces a Ovusuricry the cppact ve Prive Coutrols ۶ * Okooge fo poasuer surhus ٠ ‏د‎ @-@=(10 - 0.0F = $17.0 bition * Ckoage ia producer surplus ٠ ‏ن - ق- د‎ - 10-0 = -$19.0 bios

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rice Ovurols und Onturd Gus Ghorieces a Ovusurtey the Ieopact oP Prive Cvctrols © (9°7S dows, deadweight bos = -D-O=-O. - 0-۹0. ‏ما‎ *1a SOOO dolars, the deadweight loss is ع0 عبت 9

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۱ a Cowpertive Darket ® Okeu ‏ول‎ cowpetiive workets ‏سس‎ ‎foePPiciedt ‏اه وا‎ resvurces or azarket Potkire? 0) ECnxtercatiies * Costs or beuePits that do ont show up us pot oP the warket price (ey. potutiost) 9 ۵۷» 0

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۱ a Cowpertive Darket ® Okeu ‏ول‎ cowpetiive workets ‏سس‎ ‎foePPiciedt ‏اه وا‎ resvurces or azarket Potkire? ©) back oP IcPorcratica ‎preveds DOCKETS‏ وا تارب ‎

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۱ a Cowpertive Darket © Govercvedt ittervecivg io these warkets co © Governed ttervediod without ‏اوه وه‎ loss. 9 ۵ 60

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OePore boss Okeu Price ds Welt Orlow Oorket+-Oleurtay Levet

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Dhrt work te decker bee be PQ, = Qo? 60-66 OePore boss Okeu Price Is Welt Obove Darket+-Okeortay bevel Oho price ‏ع‎ ‎Pree ‏ات لور‎ bwer tras Pg ody Qe Abe took, Mer

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Dee Oarket Por Wud ‏عرص‎ 2 Dhke (OOF Oatiood Ored Mroasploctation Ort probibits the sole oP ores Por ‏كصالداحه ]| مت‎ . " odoin the Iepact oP the Pot * Suppl: 6۵۴ 29,000 + 0۵ oF ‏دص‎ 520,000, © - 00 ® Dewan: GQ? =190,000 -O.cP وه ی 9

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The Oorket Por Kideeps, sod GPPevi DP te 908 ‏مرن‎ Treasphrataicd Oot ارو( ره 4666 ۱۳ | , مود سم ما صلی | 097

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حرصل) وا و۳ ت0۷( ‎The‏ ‎Phe oot benits the quectiy supplied (docativas) t7‏ "ا .8,000 ‎1" Loss to supplier surplus: ۰ 6 + ‏ن‎ < ‎)© ,0000()52 00 ,©0000( + )0/2()62,00000( ۱ )890,)00000( ۶2 90/۰ ‎9 Oke OS ‎

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Dee Oarket Por Wud ‏عرص‎ ® (Gan to recipies: ۰ ۵-0 < (C,000)($20,000) - (VE\(F,000) ($20,000) = $4COkw. ® Oeuduright loss: ©» ‏قن‎ + 7 500006 ‏منت 5060 - مطلله‎ = $00 wiv ی 9 ۱

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Dee Oarket Por Wud ‏عرص‎ ® Other IeePPiviexsy Cost 0) ) ‏وصلادصوص ا‎ is wt wevessuriy to those ‏.عدص اج ول ها اور مار‎ ©) Price wo toreuse to $FO, OOO, the equilbriucy prive, wits kospitas 9 Oke OP

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Dee Oarket Por Wud ‏عرص‎ " peeved it Pavor oP probibittacy the sole bP ۱ 9 Oke CO ى ول یاه ماه مهوت )0 و للم ادص

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Dee Oarket Por Wud ‏عرص‎ " peeved it Pavor oP probibittacy the sole bP DTS: 9( ‏تساه وا تاه(‎ arora to the ubiliy to pay *Wolkdicg price below equilbriuc vil ‏وج‎ ‎shortages ‎* Ones versus anficid substitutes 9 Obte SS

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Orica Prices ® Qeriodicdly wovernwed policy seeks to rose ® Oe wil westicuie this by ookieg ot ‏وعم و‎ ۱ ced the wwivievus Woe. 9 ۵» 0

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rive Ori

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The ‏منم(‎ Ouge

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لب( صزو) مصصطه: لت عاا 19129-01900 رنی() 8 تم لصي ححات . 8). (ل) دوا 1" )]( ‏دز جعوححات عدزدب صا كمضا وصتادانبج رج‎ the ‏از‎ ® Gowe drives werged ‏اه اون وه‎ oP busiuess us ‏روت‎ virdices eutered the indusiry. 9 ی 9

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9 بو < ملس و ۳ ‎cond‏ ۵ب من سر ۵ سر ‎9 ‎ ‎ ‎GPPect oP @irice Recqukatica by the Oil Berousutics Board

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Orde ‏روص(‎ Duta 49۶9 4990 4999 990 9 ‎oP cwrters 999 8‏ ای( و06 ووجه )%( ‎brn Par‏ سس ‎Pusseuger-wie rote‏ ‏©0988 600. ©60.(صولاط 0996 ممصم ) 9 1 ‎Red vost trex (IOGO=100) 400099400 ۰ ۳/۰9 ‎9 ‏اه »وله بوسو‎ PorPetostioreers OPOOOO ‎1099 ‎

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Orde ‏روص(‎ Duta © Oidue tedustry dota show: 0) Loorenod odustvedt us the cube DP pomiers iworeused und prives ۱ ©) Aigher trod Pactors iodicaticey wone 9 ‏ی‎ SO

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”] ‏رطس لح‎ Duta Orline show: ‏علطم‎ dota irc (۳۹ داد سای پوت دی )8 ‎(dusted‏ ho

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rice Gupports acd @roduoiiod Quotes ® Duck ‏جنرت اه‎ polio ts bused ooo systew ‏عم اه‎ ‎ubvve the equilbriuc‏ او ها مر ای اه ‎to‏ ها کر ای مان جع ا" جصلادد ۱ ۱ ‎9 Ore SO ‎

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۱ a prie P, + be wrerword baw qty Q,. The chou tr 0 a power suphe = 49 - 0, \ ead te choage ta producer ‏ساد جح ار‎ « © © + ©

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rive Gupports ® Qvuestiod 041s there 0 wore BP Pines Wop to ‏عمجم‎ ‎Parwer’s iwowe by 0 +P + D? 9 9 0

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rice Gupports acd @roduoiiod Quotes # Produntivd Quotas © De qovercsvedt coo dsv couse the price bP a youd to rise by reduciay supply. لب 9

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rice Gupports acd @roduoiiod Quotes ® kot ts the icppuot oP: 0) Cortroticey Pury iv ‏همه با‎ ‏سكامويه‎ ۱ 9 Obde PS

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Guppy QResirivives 6 سس رای ۵+ ‎o‏

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Guppy QResirivives o *P, w wxtckcod wake ‏هه لت‎ ‏ممم »بو‎ - © + 0+ © و

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Obde FO 9. Guppy Qestrictiow = APG=@0-C+O+ Ore C+O=@0+@ra. ‎choc to‏ وا ا ‎power ocd producer‏ جه ‎sure te the suxve‏ ‎wits price Supports.‏ ‏+ - د 5 ‎00 - 0 -- 0-2-0-0: ‎

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Guppy QResirivives تسین ۲ © Wow could the vost ud still subsidize the ‏و‎ © Ohick is wore costly: ع دی 9

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Gupporiicy tke Price oP Okeut 60 9 ‎Guppy: 0۵ < 1900060 + 9800۵‏ © 0 - 29,990 و60 من و 0 ‎pice ood quactiy was $9.PO0 ued‏ نان( و ‎wiliva bushels‏ 8,990 ‎9 Ore FO ‎

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Gupporiicy tke Price oP Okeut 0 ۷ 0 اه اه رن اسر ) و ‎COOP + @,‏ 29,60 م6 - و ,6 ۰ و9 ديو ‎٠‏ ‏6 + 8590 - 9,060 2 96800 + 4,000 6-9000 ‎wis bushels‏ ۵9-00 (۵09(۵) ع رو 9 Obde FO

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The Okeut Oorket ia 01 هوجو ۰06 و 9 كفب ‎*@OC prodwer‏

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Gupporiicy tke Price oP Okeut Pret © Nhe chomp kr opesuver surphs = (~B ) 6 < )6 0 - 5.0()6,86( - 6 ۵ < )0/6( 6۵46 ۵()6,۵90- 2,598) - 99 ‏مسب‎ ‎۰ ‏و(‎ 9 Oke 0

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Gupporiicy tke Price oP Okeut Pret © Costiv the ‏مسر‎ ‎$9.°O x ICC willica bushels = $FGC wilica © Tord post = $OCHF + PSC = $4,079 witioa © Dora ‏دوي‎ )© + )© + OC 299596 ‏مات‎ © Governved usv pod OO veuts/bushel = $009 wilica 9 Obte SO

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Gupporiicy tke Price oP Okeut 5 1: 9, export dewuerd Pell ced the wurket deoriey pve oF wheat Pell ‏م‎ ‎$4.60 /buskel. 9 Obte SO

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Gupporiicy tke Price oP Okeut «۰ 1995 ‏راب6‎ Q, =1,000 + CROP = (9009 Orw«d: Q, = CSOO - 0 ٠» ‏مسطلب ©26, 6 لع 50.60 - © - ون‎ hehe’ 55.60 - رن ۰ تس لحم وه أصطاصجا/(0 50.0 مددودو دل » جوم من لیا 9,89 ام ی 9

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Gupporiicy tke Price oP Okeut "۷ 9 © Govercevedt Purchase: 6۵ - 6660 - 166 + Q, ۰0, - 49 + ‏ه660‎ ‎۰ ‏سوه ما -- 99.00 عم‎ price Q, = ASS + 6689.0 ۵ Obte SS

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The Okeut Oorket ia (OCG

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Gupporiicy tke Price oP Okeut 5158و :دجاس <ا) مر و ‎Covered ost = $9.00 x POO =‏ © ‎$d, POC critics‏ ‎vet subsidy = OO x O,PCS =‏ 00* مسب 90,860 Dota cost > 59 .© ‏مططلاط‎ 9 Ore SP

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Gupporiicy tke Price oP Okeut ® Qvuestiod © Okatis the chooge fo poser ood producer surphis? 9 Ore SO

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Gupporiicy tke Price oP Okeut " 0998© @reedow to Pan © Qeduves price supports un quotes ‏لاحن‎ CODD wheo they yo buck ity ePP ect ucder the (O99 kaw. 9 Obte SO

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Gupporiicy tke Price oP Okeut #990 Okeut Market ۰ 9 ۰ ‏رن‎ 299006 - 69 ‏كل‎ 1906 + CORP ۰-99 ۰ ‏باه رون‎ of 0 bushel or $41.9 ‏مرا‎ 9 ۵» 0

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‘koport Quotes und TarPPs ® Qa counties use ieport quotes ued fadPPs to keep the dowestic price oP « procuot above word bevels 9 Oke Od

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‎or Quota‏ ۲۵۷۲ سیب ‎Iknports‏ عص ۱ ۳ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎ ‎

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Whe teoreuse ta price va be wwheved by a quota pr oto PP, ۶ Ores Ow aan he yan dbwesty produers. " Ve bss peers ts @ + )© +0 + 0,

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۱ ۳۱ 6 wed te spuennvedt yaks O, sv te vet cbweste produ bss & B+ OC. ۲ ۳ ‏اسب و‎ ts wed teteud, ‏ای مت متا سا‎ ‏مج بط خابو یتیس ویر‎ aloe, ee wood the vet dowestic ‏ع دوم‎ © + 0+ ©. ‏رمه‎

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میت ۲ © Ook te O.G. be beter PP Prie| vr worse oPP wi ‏مسج و‎ ‏لس(‎ oP a tar PP? (e.3. lopocese twport reviriciows ta the (OCOz) @e

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Tre Guar Quota OD ke world prive oP sar kes bed us iw uw & veus per powd, while io the 2.CG. the price kus bee CO-OS veuts per pournl. ی 9

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Tre Guar Quota BD he Ieoport oP a Restricted Darket )1955( © 0۵ . ‏عمجم انا 19.9 = مصاص لمم‎ * O.6. wmeeeopiivd = CC. ‏عمجم متنطا‎ © O.G. price = OS verts/pourcd © Dodd price = (1 vects/poued عه ل 9

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Tre Guar Quota © Phe Ieoport oP o Restricted Market ۰ 0.0. 6,2 6 ۰0.0. 6,2۰ ٠ 0.65. ‏ع 0 امود‎ ۵9+ 0۵۵ ۰۱0 ‏و0 مس‎ < 92.6 - 090 ‏ع و له ۵9 - م۰‎ 8.9 biioa powers 9 Oke OO

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Guar Quon it 57

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۳ 1۳7۵۷ oP a Pax or Gubsidy © Phe burded oP a tox (or the bewePit oP ‏ه‎ © Oe wil pousider u spect ic tox whick ts a tx DPE a vertaia upouet oP woop per voit sot. ۱ 9 ۷» 0

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Oe he ree (tekken the tox) pred by bere. Ov be prow wolore rece, wi oP te tox. The burdew OP the hax by pit evel.

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۳ 6 وه ‎DP‏ موب[ ‎the‏ اه نامه ع9 ‎Pour cocdiiogs thot wost‏ © fox is int place?! 0) ‏م6‎ sold ced P, wost be va the decvod hte: GQ? = QP, ©) ‏نومه‎ sold cord Py west be va the suppl bee: GP = GO(Pa, 9 Oe TS

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تن ®urded vt Geller ®urdes oo Ower ‘keopot oP a Tux Depends vu Chosticites oP Guppy and Deward

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۳ 1۳7۵۷ oP a Pax or Gubsidy ® osscthouk Proctioa ۰ 2/۶, &) ادا ‎dewoed is perPeviy‏ یرومم رخ و ‎ocd ol‏ ) ع مش جرمجواسسعمم لا ر(ظ <ر6) 9 Ore TO

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The GPPRevt oP a Tux or Gubsidy BO subseh own be onzed it wok the ‏وج‎ ‎Wy UF ‏كا د‎ 84 coo be teected us u veymtive fox. ‎seller's prive exceeds the bwver’s price.‏ با "ا ‎9 ۶ ‎

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Gubsidy ‎Vhe bevel it oP the subsidy depedds upoo‏ ا" ‎Ey/Es.‏ ‏ها یت ‎:4P the rato is sell, wost oP the bevePit‏ © ‎the‏ ‎-4P the ratio is haryp, the producer beuetits wost.‏ 0 ‎ ‎9 Ore OO ‎

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مایت 7۰ ‎٩۲۵۷‏ ظ) ® Oewswicg ‏ان پا سا‎ GO Ora Cusvice و۳ 9 ‏ی‎ 0-5-6 6 29080 -SOP © Bok app = OF ‏من + 60 - 0و‎ © Q®=G? a $d aed COO biog yalves per pear (br) 9 9۷» 0

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مایت 7۰ ‎٩۲۵۷‏ ظ) 2 Oik a SO vet tax ٠ ‏و 0 + 290 ,9006 - 2-190 رن‎ < ۰ 190 -900)6,+ 00( 2 9060 + 0, ٠ ‏هم دري‎ ٠ص ‏يم +ده د‎ ۰:۰0 دی 9

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‎Tux‏ ام( 62 90 وه هم سب 9 0 ‏و0 بسا ‎Cups‏ ‎Phe ‏حصب لجيه‎ Prow te tex ‏د‎ .60)6©( or $PP.9 bio. The byer ‏اجه مج سا ی قدصت 06 سوم‎ te ‏لو‎ paw GO vr. ‎ ‎ ‎Producer‏ بسا ‎Cuphs‏ ‎ ‎rect (blow ‎ ‎© 5090-00 dco ‎ ‎Oe OF‏ وه ‎ ‎ ‎

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060 ۲ ) ‏ارب‎ wodels oP supply ocd devo poo be sed ty codae o wide vodety oP yoverniedt polivies. 4a cok coe, cower und producer surplus ure used to evolve the yoies urd ۱ losses to cows ‏لو‎ producers. 9 Ore OO

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060 ® ‏میا(‎ qovernnved ‏مور‎ ٩ ‏و و‎ subsidy, ه صا جلوصا برأوسجوصل ‎Governnvedt terveuiod‏ ® deadweight lass. 9 Oke OF

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3 رو د و مرا مرن () ظ و و جرورببات ‎wourket is uot‏ 9 Okt 66

Chapter 9 The Analysis of Competitive Markets Topics to be Discussed  Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus  The Efficiency of a Competitive Market  Minimum Prices Chapter 9 Slide 2 Topics to be Discussed  Price Supports and Production Quotas  Import Quotas and Tariffs  The Impact of a Tax or Subsidy Chapter 9 Slide 3 Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus  Review  Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good.  Producer surplus is the total benefit or revenue that producers receive beyond what it cost to produce a good. Chapter 9 Slide 4 Consumer and Producer Surplus Price 10 Consumer Surplus S 7 Between 0 and Q0 consumers A and B receive a net gain from buying the product-consumer surplus 5 Producer Surplus Between 0 and Q0 producers receive a net gain from selling each product-producer surplus. D 0 Consumer A Q0 Consumer B Consumer C Quantity Evaluating the Gains and Losses from Government Policies--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.  Welfare Effects Gains and losses caused by government intervention in the market. Chapter 9 Slide 6 Change in Consumer and Producer Surplus from Price Controls Suppose the government imposes a price ceiling Pmax which is below the market-clearing price P0. Price S Deadweight Loss The gain to consumers is the difference between the rectangle A and the triangle B. B P0 A C Pmax D Q1 Chapter 9 Q0 The loss to producers is the sum of rectangle A and triangle C. Triangle B and C together measure the deadweight loss. Q2 Quantity Slide 7 Change in Consumer and Producer Surplus from Price Controls  Observations:  The total loss is equal to area B + C.  The total change in surplus = (A - B) + (-A - C) = -B - C  The deadweight loss is the inefficiency of the price controls or the loss of the producer surplus exceeds the gain from consumer surplus. Chapter 9 Slide 8 Change in Consumer and Producer Surplus from Price Controls  Observation  Consumers can experience a net loss in consumer surplus when the demand is sufficiently inelastic Chapter 9 Slide 9 Effect of Price Controls When Demand Is Inelastic If demand is sufficiently inelastic, triangle B can be larger than rectangle A and the consumer suffers a net loss from price controls. D Price S B P0 Pmax C A Q1 Chapter 9 Example Oil price controls and gasoline shortages in 1979 Q2 Quantity Slide 10 Price Controls and Natural Gas Shortages  1975 Price controls created a shortage of natural gas.  What was the deadweight loss? Chapter 9 Slide 11 Price Controls and Natural Gas Shortages Data Data for for 1975 1975  Supply: QS = 14 + 2PG + 0.25PO  Quantity  Demand: QD = -5PG + 3.75PO  Quantity  supplied in trillion cubic feet (Tcf) demanded (Tcf) PG = price of natural gas in $/mcf and PO = price of oil in $/b. Chapter 9 Slide 12 Price Controls and Natural Gas Shortages Data Data for for 1975 1975  PO = $8/b  Equilibrium PG = $2/mcf and Q = 20 Tcf  Price ceiling set at $1  This information can be seen graphically: Chapter 9 Slide 13 Price Controls and Natural Gas Shortages Price ($/mcf) D S The gain to consumers is rectangle A minus triangle B, and the loss to producers is rectangle A plus triangle C. 2.40 B 2.00 C A (Pmax)1.00 0 Chapter 9 5 10 15 18 20 25 30 Quantity (Tcf) Slide 14 Price Controls and Natural Gas Shortages  Measuring the Impact of Price Controls 1 Tcf = 1 billion mcf  If QD = 18, then P = $2.40 [18 = -5PG + 3.75(8)] A = (18 billion mcf) x ($1/mcf) = $18 billion B = (1/2) x (2 b. mcf) x ($0.40/mcf) = $0.4 billion C = (1/2) x (2 b. mcf) x ($1/mcf) = $1 billion Chapter 9 Slide 15 Price Controls and Natural Gas Shortages  Measuring the Impact of Price Controls  1975  Change in consumer surplus =  Change in producer surplus = Chapter 9 A - B = 18 - 0.04 = $17.6 billion -A - C = -18-1 = -$19.0 billion Slide 16 Price Controls and Natural Gas Shortages  Measuring the Impact of Price Controls  1975   Chapter 9 dollars, deadweight loss = -B - C = -0.4 - 1 = -$1.4 billion In 2000 dollars, the deadweight loss is more than $4 billion per year. Slide 17 The Efficiency of a Competitive Market  When do competitive markets generate an inefficient allocation of resources or market failure? 1) Externalities  Chapter 9 Costs or benefits that do not show up as part of the market price (e.g. pollution) Slide 18 The Efficiency of a Competitive Market  When do competitive markets generate an inefficient allocation of resources or market failure? 2) Lack of Information  Chapter 9 Imperfect information prevents consumers from making utility-maximizing decisions. Slide 19 The Efficiency of a Competitive Market  Government intervention in these markets can increase efficiency.  Government intervention without a market failure creates inefficiency or deadweight loss. Chapter 9 Slide 20 Welfare Loss When Price Is Held Below Market-Clearing Level Price S When price is regulated to be no higher than P1, the deadweight loss given by triangles B and C results. B P0 A C P1 D Q1 Chapter 9 Q0 Quantity Slide 21 Welfare Loss When Price Is Held Above Market-Clearing Level When price is regulated to be no lower than P2 only Q3 will be demanded. The deadweight loss is given by triangles B and C Price S P2 A P0 B C What would the deadweight loss be if QS = Q2? D Q3 Chapter 9 Q0 Q2 Quantity Slide 22 The Market for Human Kidneys  The 1984 National Organ Transplantation Act prohibits the sale of organs for transplantation.  Analyzing the Impact of the Act  Supply: If QS = 8,000 + 0.2P P = $20,000, Q = 12,000  Demand: Chapter 9 QD = 16,000 - 0.2P Slide 23 The Market for Kidneys, and Effects of the 1984 Organ Transplantation Act S’ Price The 1984 act effectively makes the price zero. S $40,000 $30,000 The loss to suppliers is given by rectangle A and triangle C. D If consumers received kidneys at no cost, their gain would be given by rectangle A less triangle B. B $20,000 C $10,000 0 Chapter 9 A 4,000 D 8,000 12,000 Rectangles A and D measure the total value of kidneys when supply is constrained. Quantity Slide 24 The Market for Human Kidneys  The act limits the quantity supplied (donations) to 8,000.  Loss to supplier surplus: A +C= (8,000)($20,000) + (1/2)(4,000) ($20,000) = $200/m. Chapter 9 Slide 25 The Market for Human Kidneys  Gain to recipients: A -B= (8,000)($20,000) - (1/2)(4,000) ($20,000) = $120/m.  Deadweight loss: B + C or $200 million - $120 million = $80 million Chapter 9 Slide 26 The Market for Human Kidneys  Other Inefficiency Cost 1) Allocation is not necessarily to those who value the kidney’s the most. 2) Price may increase to $40,000, the equilibrium price, with hospitals getting the price. Chapter 9 Slide 27 The Market for Human Kidneys  Arguments in favor of prohibiting the sale of organs: 1) Chapter 9 Imperfect information about donor’s health and screening Slide 28 The Market for Human Kidneys  Arguments in favor of prohibiting the sale of organs: 2) Chapter 9 Unfair to allocate according to the ability to pay  Holding price below equilibrium will create shortages  Organs versus artificial substitutes Slide 29 Minimum Prices  Periodically government policy seeks to raise prices above market-clearing levels.  We will investigate this by looking at a price floor and the minimum wage. Chapter 9 Slide 30 Price Minimum If producers produce Q2, the amount Q2 - Q3 will go unsold. Price S The change in producer surplus will be A - C - D. Producers may be worse off. Pmin A B C P0 D D Q3 Chapter 9 Q0 Q2 Quantity Slide 31 The Minimum Wage Firms are not allowed to pay less than wmin. This results in unemployment. w S wmin A The deadweight loss is given by triangles B and C. B C w0 Unemployment L1 Chapter 9 L0 D L2 L Slide 32 Airline Regulation  During 1976-1981 the airline industry in the U.S. changed dramatically.  Deregulation lead to major changes in the industry.  Some airlines merged or went out of business as new airlines entered the industry. Chapter 9 Slide 33 Effect of Airline Regulation by the Civil Aeronautics Board Prior to deregulation price was at Pmin and QD = Q1 and Qs = Q2. Price S Area D is the cost of unsold output. Pmin A P0 B After deregulation: Prices fell to PO. The change in consumer surplus is A + B. C D D Q1 Q3 Q0 Chapter 9 Q2 Quantity Slide 34 Airline Industry Data 1975 1980 1985 1990 1995 1996 Number of carriers 3372 86608696 Passenger load factor(%) 5459 61626769 Passenger-mile rate Real cost index (1995=100) Real cost index corrected (constant 1995 dollars).218.210.166 .150.129.126 101122111 10710099 for fuel cost increases 10010098 949898 Airline Industry Data  Airline industry data show: 1) Long-run adjustment as the number of carriers increased and prices decreased 2) Higher load factors indicating more efficiency Chapter 9 Slide 36 Airline Industry Data  Airline industry data show: 3) Falling rates 4) Real cost increased slightly (adjusted fuel cost) 5) Large welfare gain Chapter 9 Slide 37 Price Supports and Production Quotas  Much of agricultural policy is based on a system of price supports. This is support price is set above the equilibrium price and the government buys the surplus.  This is often combined with incentives to reduce or restrict production Chapter 9 Slide 38 Price Supports Price S Qg Ps A P0 To maintain a price Ps the government buys quantity Qg . The change in consumer surplus = -A - B, and the change in producer surplus is A + B + D D B D + Qg D Q1 Chapter 9 Q0 Q2 Quantity Slide 39 Price Supports The cost to the government is the speckled rectangle Ps(Q2-Q1) Price S Qg Ps A P0 Total welfare loss D-(Q2-Q1)ps D B Total Welfare Loss D + Qg D Q1 Chapter 9 Q0 Q2 Quantity Slide 40 Price Supports  Question:  Is there a more efficient way to increase farmer’s income by A + B + D? Chapter 9 Slide 41 Price Supports and Production Quotas  Production Quotas  The government can also cause the price of a good to rise by reducing supply. Chapter 9 Slide 42 Price Supports and Production Quotas  What is the impact of: 1) Controlling entry into the taxicab market? 2) Controlling the number of liquor licenses? Chapter 9 Slide 43 Supply Restrictions •Supply restricted to Q1 •Supply shifts to S’ @ Q1 S’ Price S PS D A B P0 •CS reduced by A + B •Change in PS = A - C •Deadweight loss = BC C D Q1 Chapter 9 Q0 Quantity Slide 44 Supply Restrictions •Ps is maintained with and incentive •Cost to government = B + C + D S’ Price S PS D A B P0 C D Q1 Chapter 9 Q0 Quantity Slide 45 Supply Restrictions  PS= A - C + B + S’ Price C + D = A + B + D.   The change in consumer and producer surplus is the same as with price supports. S PS A P0 D B C = -A - B + A +B+D-B-Cwelfare D = -B - C. D Q0 Chapter 9 Quantity Slide 46 Supply Restrictions  Questions: could the government reduce the cost and still subsidize the farmer? S’ Price  How  Which is more costly: supports or acreage limitations? S PS A P0 D B C D Q0 Chapter 9 Quantity Slide 47 Supporting the Price of Wheat  1981  Supply: Qs = 1,800 + 240P  Demand: QD = 3,550 - 266P  Equilibrium price and quantity was $3.46 and 2,630 million bushels Chapter 9 Slide 48 Supporting the Price of Wheat  1981  Price Q D+ Q S support was set at $3.70 QG = QDT = 3,440 -266P + QG = QD 1,800 + 240P = 3,550 - 266P + QG QG = 506P -1,750 QG = (506)(3.70) -175=122 million bushels Chapter 9 Slide 49 The Wheat Market in 1981 •AB consumer loss •ABC producer gain Price Qg P0 = $3.70 P0 = $3.46 A B C S By buying 122 million bushels the government increased the market-clearing price. D + Qg D 1,800 Chapter 9 2,566 2,630 2,688 Quantity Slide 50 Supporting the Price of Wheat  1981  The change in consumer surplus = (-A -B) A = (3.70 - 3.46)(2,566) = $616 million B = (1/2)(3.70-3.46)(2,6302,566) = $8 million Change in consumer surplus: -$624 million. Chapter 9 Slide 51 Supporting the Price of Wheat  1981  Cost to the government: $3.70 x 122 million bushels = $452 million  Total cost = $624 + 452 = $1,076 million  Total gain = A + B + C = $638 million  Government also paid 30 cents/bushel = $806 million Chapter 9 Slide 52 Supporting the Price of Wheat  In 1985, export demand fell and the market clearing price of wheat fell to $1.80/bushel. Chapter 9 Slide 53 Supporting the Price of Wheat  1985 Supply: QS = 1,800 + 240P  1986 Demand: QD = 2580 - 194P Q S = QD at $1.80 and 2,232 million bushels P S = $3.20  Chapter 9 To maintain $3.20/bushel a production quota of 2,425 bushels was imposed Slide 54 Supporting the Price of Wheat  1985  Government Purchase: 2,425 = 2,580 - 194P + QG Q G P = -155 + 194P = $3.20 -- the support price Q = -155 + 194($3.20) = 466 million bushels G Chapter 9 Slide 55 The Wheat Market in 1985 S’ Price S QS To increase the price to $3.20, the government bought 466 million bushels and imposed a production quota of 2,425 bushels. P0 = $3.20 P0 = $1.80 D 1,800 1,959 Chapter 9 2,232 2,425 D + QS Quantity Slide 56 Supporting the Price of Wheat  1985  Government Chapter 9 Purchase:  Government cost = $3.20 x 466 = $1,491million  80 cent subsidy = .80 x 2,425 = $1,940 million  Total cost = $3.5 billion Slide 57 Supporting the Price of Wheat  Question:  What is the change in consumer and producer surplus? Chapter 9 Slide 58 Supporting the Price of Wheat  1996 Freedom to Farm  Reduces price supports and quotas until 2003 when they go back into effect under the 1996 law. Chapter 9 Slide 59 Supporting the Price of Wheat  1998 Wheat Market P = $2.65 Q = 3244 - 283P Q = 1944 + 207P D S Q = 2493 Government Chapter 9 subsidy of .66/bushel or $1.6 billion Slide 60 Import Quotas and Tariffs  Many countries use import quotas and tariffs to keep the domestic price of a product above world levels Chapter 9 Slide 61 Import Tariff or Quota That Eliminates Imports In a free market, the domestic price equals the world price PW. Price S P0 A B PW By eliminating imports, the price is increased to PO. The gain is area A. The loss to consumers A + B + C, so the deadweight loss is B + C. C D Imports QS Chapter 9 Q0 QD How high would a tariff have to be to get the same result? Quantity Slide 62 Import Tariff or Quota (general case)  The increase in price can be achieved by a quota or a tariff.  Area A is again the gain to domestic producers.  The loss to consumers is A + B + C + D. S Price P* A B Pw D C D QS Chapter 9 Q’S Q’D QD Slide 63 Quantity Import Tariff or Quota (general case)   If a tariff is used the government gains D, so the net domestic product loss is B + C. If a quota is used instead, rectangle D becomes part of the profits of foreign producers, and the net domestic loss is B + C + D. S Price P* A B Pw D C D QS Chapter 9 Q’S Q’D QD Slide 64 Quantity Import Tariff or Quota (general case)  Question:  Would the U.S. be better off Price or worse off with a quota instead of a tariff? (e.g. Japanese import restrictions P* in the 1980s) S A B Pw D C D QS Chapter 9 Q’S Q’D QD Slide 65 Quantity The Sugar Quota  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. Chapter 9 Slide 66 The Sugar Quota  The Impact of a Restricted Market (1997)  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 Chapter 9 Slide 67 The Sugar Quota  The Impact of a Restricted Market  U.S. ES = 1.54  U.S. ED = -0.3  U.S. supply: QS = -7.83+ 1.07P  U.S. demand: QD = 27.45 - 0.29P P Chapter 9 = .23 and Q = 13.7 billion pounds Slide 68 Sugar Quota in 1997 DUS SUS Price (cents/lb.) PUS = 21.9 20 A The cost of the quotas to consumers was A + B + C + D, or $2.4b. The gain to producers was area A, or $1b. D 16 B C PW = 11 11 8 4 0 Qd = 24.2 5 QS = 4.0 10 15 Q’S = 15.6 20 25 Q’d = 21.1 30 Quantity (billions of pounds) Sugar Quota in 1997 DUS SUS Price (cents/lb.) PUS = 21.9 20 A 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. D 16 B C PW = 11 11 8 4 0 Qd = 24.2 5 QS = 4.0 10 15 Q’S = 15.6 20 25 Q’d = 21.1 30 Quantity (billions of pounds) 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.  We will consider a specific tax which is a tax of a certain amount of money per unit sold. Chapter 9 Slide 71 Incidence of a SpecificTax Pb is the price (including the tax) paid by buyers. PS is the price sellers receive, net of the tax. The burden of the tax is split evenly. Price Pb P0 PS A D Buyers lose A + B, and sellers lose D + C, and the government earns A + D in revenue. The deadweight loss is B + C. B C t S D Q1 Chapter 9 Q0 Quantity Slide 72 Incidence of a Specific Tax  Four conditions that must be satisfied after the tax is in place: 1) Quantity sold and Pb must be on the demand line: QD = QD(Pb) 2) Quantity sold and PS must be on the supply line: QS = QS(PS) Chapter 9 Slide 73 Incidence of a Specific Tax  Four conditions that must be satisfied after the tax is in place: 3) QD = Q S 4) Pb - PS = tax Chapter 9 Slide 74 Impact of a Tax Depends on Elasticities of Supply and Demand Burden on Buyer Burden on Seller D Price S Price Pb S t P0 Pb P0 PS t D PS Q1 Q0 Quantity Q 1 Q0 Quantity The Impact of a Tax or Subsidy  Pass-through fraction E /(ES - Ed) S  For example, when demand is perfectly inelastic (Ed = 0), the pass-through fraction is 1, and all the tax is borne by the consumer. Chapter 9 Slide 76 The Effects of a Tax or Subsidy  A subsidy can be analyzed in much the same way as a tax.  It can be treated as a negative tax.  The seller’s price exceeds the buyer’s price. Chapter 9 Slide 77 Subsidy Price S Like a tax, the benefit of a subsidy is split between buyers and sellers, depending upon the elasticities of supply and demand. PS s P0 Pb D Q0 Chapter 9 Q1 Quantity Slide 78 Subsidy  With a subsidy (s), the selling price Pb is below the subsidized price PS so that: s Chapter 9 = PS - Pb Slide 79 Subsidy  The benefit of the subsidy depends upon Ed /ES.  If the ratio is small, most of the benefit accrues to the consumer.  If Chapter 9 the ratio is large, the producer benefits most. Slide 80 A Tax on Gasoline  Measuring the Impact of a 50 Cent Gasoline Tax  Intermediate-run EP of demand = -0.5 QD = 150 - 50P E P of supply = 0.4 QS = 60 + 40P  QS = QD at $1 and 100 billion gallons per (bg/yr) Chapter 9 year Slide 81 A Tax on Gasoline  With a 50 cent tax Q D = 150 - 50Pb = 60 + 40PS = QS  150 - 50(PS+ .50) = 60 + 40PS P S = .72 P b = .5 + PS P b = $1.22 Chapter 9 Slide 82 A Tax on Gasoline  With a 50 cent tax Q = 150 -(50)(1.22) = 89 bg/yr Q falls by 11% Chapter 9 Slide 83 Impact of a 50 Cent Gasoline Tax D Price ($ per 1.50 gallon) Pb = 1.22 P0 = 1.00 S Lost Consumer Surplus The annual revenue from the tax is .50(89) or $44.5 billion. The buyer pays 22 cents of the tax, and the producer pays 28 cents. A t = 0.50 D Lost Producer Surplus PS = .72 .50 11 0 Chapter 9 5060 89100 150 Quantity (billion gallons per year) Slide 84 Impact of a 50 Cent Gasoline Tax D Price ($ per 1.50 gallon) Pb = 1.22 P0 = 1.00 S Lost Consumer Surplus A Deadweight loss = $2.75 billion/yr t = 0.50 D Lost Producer Surplus PS = .72 .50 11 0 Chapter 9 5060 89100 150 Quantity (billion gallons per year) Slide 85 Summary  Simple models of supply and demand can be used to analyze a wide variety of government policies.  In each case, consumer and producer surplus are used to evaluate the gains and losses to consumers and producers. Chapter 9 Slide 86 Summary  When government imposes a tax or subsidy, price usually does not rise or fall by the full amount of the tax or subsidy.  Government intervention generally leads to a deadweight loss. Chapter 9 Slide 87 Summary  Government intervention in a competitive market is not always a bad thing. Chapter 9 Slide 88 End of Chapter 9 The Analysis of Competitive Markets

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