Chapter9TheAnalysisofCompetitiveMarketsChapter9TheAnalysisofCompeTopicstobeDiscussedEvaluatingtheGainsandLossesfromGovernmentPoliciesTheEfficiencyofaCompetitiveMarketMinimumPricesPriceSupportsandProductionQuotasImportQuotasandTariffsTheImpactofaTaxorSubsidy2Chapter9TopicstobeDiscussedEvaluati

ConsumerandProducerSurplusWhengovernmentcontrolsprice,somepeoplearebetteroffMaybeabletobuyagoodatalowerpriceButwhatistheeffectonsocietyasawhole?Istotalwelfarehigherorlowerandbyhowmuch?Awaytomeasuregainsandlossesfromgovernmentpoliciesisneeded3Chapter9

ConsumerandProducerSurplusConsumerandProducerSurplusConsumersurplusisthetotalbenefitorvaluethatconsumersreceivebeyondwhattheypayforthegoodAssumemarketpriceforagoodis$5Someconsumerswouldbewillingtopaymorethan$5forthegoodIfyouwerewillingtopay$9forthegoodandpay$5,yougain$4inconsumersurplus4Chapter9ConsumerandProducerSurplusCConsumerandProducerSurplusThedemandcurveshowsthewillingnesstopayforallconsumersinthemarketConsumersurpluscanbemeasuredbytheareabetweenthedemandcurveandthemarketpriceConsumersurplusmeasuresthetotalnetbenefittoconsumers5Chapter9ConsumerandProducerSurplusTConsumerandProducerSurplusProducersurplusisthetotalbenefitorrevenuethatproducersreceivebeyondwhatitcoststoproduceagoodSomeproducersproduceforlessthanmarketpriceandwouldstillproduceatalowerpriceAproducermightbewillingtoaccept$3forthegoodbutget$5marketpriceProducergainsasurplusof$26Chapter9ConsumerandProducerSurplusPConsumerandProducerSurplusThesupplycurveshowstheamountthataproduceriswillingtotakeforacertainamountofagoodProducersurpluscanbemeasuredbytheareabetweenthesupplycurveandthemarketpriceProducersurplusmeasuresthetotalnetbenefittoproducers7Chapter9ConsumerandProducerSurplusTConsumerandProducerSurplusBetween0andQ0

producersreceiveanetgainfromsellingeachproduct--producersurplus.ConsumerSurplusQuantityPriceSDQ059Between0andQ0consumerAreceivesanetgainfrombuyingtheproduct--consumersurplus.ProducerSurplus3QDQS8Chapter9ConsumerandProducerSurplusBConsumerandProducerSurplusTodeterminethewelfareeffectofagovernmentalpolicy,wecanmeasurethegainorlossinconsumerandproducersurplusWelfareEffectsGainsandlossestoproducersandconsumers9Chapter9ConsumerandProducerSurplusTConsumerandProducerSurplusWhengovernmentinstitutesapriceceiling,thepriceofagoodcan’tgoabovethatpriceWithabindingpriceceiling,producersandconsumersareaffectedHowmuchtheyareaffectedcanbedeterminedbymeasuringchangesinconsumerandproducersurplus10Chapter9ConsumerandProducerSurplusWConsumerandProducerSurplusWhenpriceisheldtoolow,thequantitydemandedincreasesandquantitysupplieddecreasesSomeconsumersareworseoffbecausetheycannolongerbuythegoodDecreaseinconsumersurplusSomeconsumersarebetteroffbecausetheycanbuyitatalowerpriceIncreaseinconsumersurplus11Chapter9ConsumerandProducerSurplusWConsumerandProducerSurplusProducersselllessatalowerpriceSomeproducersarenolongerinthemarketBothoftheseproducergroupsloseandproducersurplusdecreasesTheeconomyasawholeisworseoffsincesurplusthatusedtobelongtoproducersorconsumersissimplygone12Chapter9ConsumerandProducerSurplusPThelosstoproducersisthesumofrectangleAandtriangleCBACConsumersthatcanbuythegoodgainAPriceControlandSurplusChangesQuantityPriceSDP0Q0PmaxQ1Q2Consumersthatcannotbuy,loseBTrianglesBandCarelossestosociety–deadweightloss13Chapter9ThelosstoproducersisthesPriceControlsandWelfareEffectsThetotallossisequaltoareaB+CThedeadweightlossistheinefficiencyofthepricecontrols–thetotallossinsurplus(consumerplusproducer)Ifdemandissufficientlyinelastic,lossestoconsumersmaybefairlylargeThiscanhaveeffectsinpoliticaldecisions14Chapter9PriceControlsandWelfareEffBAPmaxCQ1Withinelasticdemand,triangleBcanbelargerthanrectangleAandconsumerssuffernetlossesfrompricecontrols.SDPriceControlsWithInelasticDemandQuantityPriceP0Q215Chapter9BAPmaxCQ1WithinelasticdemandPriceControlsand

NaturalGasShortagesFromexampleinChapter2,1975PricecontrolscreatedashortageofnaturalgasWhatwastheeffectofthosecontrols?DecreasesinsurplusandoveralllossforsocietyWecanmeasurethesewelfareeffectsfromthedemandandsupplyofnaturalgas16Chapter9PriceControlsand

NaturalGaPriceControlsand

NaturalGasShortagesQS=14+2PG+0.25POQuantitysuppliedintrillioncubicfeet(Tcf)QD=-5PG+3.75POQuantitydemanded(Tcf)PG=priceofnaturalgasin$/mcfPO=priceofoilin$/b17Chapter9PriceControlsand

NaturalGaPriceControlsand

NaturalGasShortagesUsingPO=$8/bandgivesequilibriumvaluesfornaturalgasPG=$2/mcfandQG=20TcfPriceceilingwassetat$1/mcfShowingthisgraphically,wecanseeandmeasuretheeffectsonproducerandconsumersurplus18Chapter9PriceControlsand

NaturalGaBACThegaintoconsumersisrectangleAminustriangleB,andthelosstoproducersisrectangleAplustriangleC.SD2.002.40Price($/mcf)Quantity(Tcf)05101520253018(Pmax)1.00PriceControlsand

NaturalGasShortages19Chapter9BACThegaintoconsumersisSDPriceControlsand

NaturalGasShortagesMeasuringtheImpactofPriceControlsA=(18billionmcf)x($1/mcf)= $18billionB=(1/2)x(2b.mcf)x($0.40/mcf)= $0.4billionC=(1/2)x(2b.mcf)x($1/mcf)= $1billion20Chapter9PriceControlsand

NaturalGaPriceControlsand

NaturalGasShortagesMeasuringtheImpactofPriceControlsin1975Changeinconsumersurplus=A-B=18-0.4=$17.6billionGainChangeinproducersurplus=A+C=18+1=$19.0billionLossDeadWeightLoss=B+C=0.4+1=$1.4billionLoss21Chapter9PriceControlsand

NaturalGaTheEfficiencyof

aCompetitiveMarketIntheevaluationofmarkets,weoftentalkaboutwhetheritreacheseconomicefficiencyMaximizationofaggregateconsumerandproducersurplusPoliciessuchaspricecontrolsthatcausedeadweightlossesinsocietyaresaidtoimposeanefficiencycostontheeconomy22Chapter9TheEfficiencyof

aCompetitivTheEfficiencyof

aCompetitiveMarketIfefficiencyisthegoal,thenyoucanarguethatleavingmarketsaloneistheanswerHowever,sometimesmarketfailuresoccurPricesfailtoprovidepropersignalstoconsumersandproducersLeadstoinefficientunregulatedcompetitivemarket23Chapter9TheEfficiencyof

aCompetitivTypesofMarketFailuresExternalitiesCostsorbenefitsthatdonotshowupaspartofthemarketprice(e.g.pollution)CostsorbenefitsareexternaltothemarketLackofInformationImperfectinformationpreventsconsumersfrommakingutility-maximizingdecisionsGovernmentinterventionmaybedesirableinthesecases24Chapter9TypesofMarketFailuresExternTheEfficiencyofaCompetitiveMarketOtherthanmarketfailures,unregulatedcompetitivemarketsleadtoeconomicefficiencyWhatifthemarketisconstrainedtoapricehigherthantheeconomicallyefficientequilibriumprice?25Chapter9TheEfficiencyofaCompetitivBACPriceControlandSurplusChangesQuantityPriceSDP0Q0PminQ1Q2WhenpriceisregulatedtobenolowerthanPmin,thedeadweightlossgivenbytrianglesBandCresults.26Chapter9BCPriceControlandSurplusChTheEfficiencyofaCompetitiveMarketDeadweightlosstrianglesBandCgiveagoodestimateoftheefficiencycostofpoliciesthatforcepriceaboveorbelowmarketclearingpriceMeasuringeffectsofgovernmentpricecontrolsontheeconomycanbeestimatedbymeasuringthesetwotriangles27Chapter9TheEfficiencyofaCompetitivTheMarketforHumanKidneysThe1984NationalOrganTransplantationActprohibitsthesaleoforgansfortransplantationWhathasbeentheimpactoftheAct?WecanmeasurethisusingthesupplyanddemandforkidneysfromestimateddataSupply:QS=8,000+0.2PDemand:QD=16,000-0.2P28Chapter9TheMarketforHumanKidneysThTheMarketforHumanKidneysSincethesaleoforgansisnotallowed,theamountavailabledependsontheamountdonatedSupplyofdonatedkidneysislimitedto8,000Thewelfareeffectofthissupplyconstraintcanbeanalyzedusingconsumerandproducersurplusinthekidneymarket29Chapter9TheMarketforHumanKidneysSiTheMarketforHumanKidneysSuppliers:Thosewhosupplythemarenotpaidthemarketprice,estimatedat$20,000LossofsurplusequaltoareaA=$160millionSomewhowoulddonatefortheequilibriumpricedonotdonateinthecurrentmarketLossofsurplusequaltoareaC=$40millionTotalconsumerlossofA+C=$200million30Chapter9TheMarketforHumanKidneysSuTheMarketforHumanKidneysRecipients:Sincetheydonothavetopayforthekidney,theygainrectangleA($140million)sincepriceis$0ThosewhocannotobtainakidneylosesurplusequaltotriangleB($40million)Netincreaseinsurplusofrecipientsof$160-$40=$120millionDeadWeightLossofC+B=$80million31Chapter9TheMarketforHumanKidneysReTheMarketforHumanKidneysOtherInefficiencyCostsAllocationisnotnecessarilytothosewhovaluethekidneysthemostPricemayincreaseto$40,000,theequilibriumprice,withhospitalsgettingtheprice32Chapter9TheMarketforHumanKidneysOtDAandDmeasurethetotalvalueofkidneyswhensupplyisconstrained.ACThelosstosuppliersisseeninareasA&C.TheMarketforKidneysQuantityPrice4,0000$10,000$30,000$40,0008,000S’BIfkidneysarezerocost,consumergainwouldbeAminusB.SD12,000$20,00033Chapter9DAandDmeasurethetotalvalTheMarketforHumanKidneysArgumentsinfavorofprohibitingthesaleoforgans:Imperfectinformationaboutdonor’shealthandscreeningUnfairtoallocateaccordingtotheabilitytopayHoldingpricebelowequilibriumwillcreateshortagesOrgansversusartificialsubstitutes34Chapter9TheMarketforHumanKidneysArMinimumPricesPeriodically,governmentpolicyseekstoraisepricesabovemarket-clearinglevelsMinimumwagelawRegulationofairlinesAgriculturalpoliciesWewillinvestigatethisbylookingattheminimumwagelegislation35Chapter9MinimumPricesPeriodically,goMinimumPricesWhenpriceissetabovethemarketclearingprice:QuantitydemandedfallsSuppliersmay,however,choosetoincreasequantitysuppliedinfaceofhigherpricesThiscausesadditionalproducerlossesequaltothetotalcostofproductionabovequantitydemanded36Chapter9MinimumPricesWhenpriceisseMinimumPricesLossesinconsumersurplusarestillthesameIncreasedpriceleadingtodecreasedquantityequalsareaAThosepricedoutofthemarketloseareaBProducersurplussimilarIncreasesfromincreasedpriceforunitssoldequaltoALossesfromdropinsalesequaltoC37Chapter9MinimumPricesLossesinconsumMinimumPricesWhatifproducersexpandproductiontoQ2fromtheincreasedprice?SincetheyonlysellQ3,thereisnorevenuetocovertheadditionalproduction(Q2-Q3)SupplycurvemeasuresMCofproductionsototalcostofadditionalproductionisareaunderthesupplycurvefortheincreasedproduction(Q2-Q3)=areaDTotalchangeinproducersurplus=A–C–D38Chapter9MinimumPricesWhatifproducerBAThechangeinproducersurpluswillbeA-C-D.Producersmaybeworseoff.CDMinimumPricesQuantityPriceSDP0Q0Q3Q2PminIfproducersproduceQ2,theamountQ2-Q3willgounsold.Dmeasurestotalcostofincreasedproductionnotsold.39Chapter9BAThechangeinproducerCDMiniMinimumWagesWageissethigherthanmarketclearingwageDecreasedquantityofworkersdemandedThoseworkershiredreceivehigherwagesUnemploymentresults,sincenoteveryonewhowantstoworkatthenewwagecan40Chapter9MinimumWagesWageissethigheBThedeadweightlossisgivenbytrianglesBandC.CAL1L2UnemploymentwminFirmsarenotallowedtopaylessthanwmin.Thisresultsinunemployment.SDw0L0TheMinimumWageLwAisgaintoworkerswhofindjobsathigherwage.41Chapter9BThedeadweightlossCAL1L2UnemAirlineRegulationBefore1970,theairlineindustrywasheavilyregulatedbytheCivilAeronauticsBoard(CAB)During1976-1981,theairlineindustryintheU.S.changeddramaticallyasderegulationledtomajorchangesSomeairlinesmergedorwentoutofbusinessasnewairlinesenteredtheindustry42Chapter9AirlineRegulationBefore1970,AirlineRegulationAlthoughpricesintheindustryfellconsiderably(helpingconsumers),profitsdidnot.RegulationcausedsignificantinefficienciesandartificiallyhighcostsWecanshowtheeffectsofthisregulationbylookingattheeffectsonsurplusfromthecontrolledprices43Chapter9AirlineRegulationAlthoughpriBACAfterderegulation:PricesfelltoPO.ThechangeinconsumersurplusisA+B.Q3DAreaDisthecostofunsoldoutput.EffectofAirlineRegulationQuantityPriceSDP0Q0Q1PminQ2PriortoderegulationpricewasatPmin.ProductionwasQ3hopingtooutsellcompetitors.44Chapter9BACAfterderegulation:Q3DAreaAirlineIndustryData45Chapter9AirlineIndustryData45ChapterAirlineIndustryDataAirlineindustrydatashow:Long-runadjustmentasthenumberofcarriersincreasedandpricesdecreasedHigherloadfactorsindicatingmoreefficiencyFallingratesRealcostincreasedslightly(adjustedfuelcost)Largewelfaregain46Chapter9AirlineIndustryDataAirlineiPriceSupportsMuchofagriculturalpolicyisbasedonasystemofpricesupportsPricessetbygovernmentabovefree-marketlevelandmaintainedbygovernmentalpurchasesofexcesssupplyGovernmentcanalsoincreasepricesthroughrestrictingproduction,directlyorthroughincentivestoproducers47Chapter9PriceSupportsMuchofagricultPriceSupportsWhataretheimpactsonconsumers,producersandthefederalbudget?ConsumersQuantitydemandedfallsandquantitysuppliedincreasesGovernmentbuyssurplusConsumersmustpayhigherpriceforthegoodLossinconsumersurplusequaltoA+B48Chapter9PriceSupportsWhataretheimpPriceSupportsProducersGainsincetheyaresellingmoreatahigherpriceProducersurplusincreasesbyA+B+DGovernmentCostofbuyingthesurplus,whichisfundedbytaxes,soindirectcostonconsumersCosttogovernment=(Q2-Q1)PS49Chapter9PriceSupportsProducers49ChaptPriceSupportsGovernmentmaybeableto“dump”someofthegoodsintheforeignmarketsHurtsdomesticproducersthatgovernmentistryingtohelpinthefirstplaceTotalwelfareeffectofpolicyCS+PS–Govt.cost=D–(Q2-Q1)PSSocietyisworseoffoverallLesscostlytosimplygivefarmersthemoney50Chapter9PriceSupportsGovernmentmaybBDATomaintainapricePsthegovernmentbuysquantityQg.D+QgQgPriceSupportsQuantityPriceSDP0Q0PsQ2Q1ENetLosstosocietyisE+B.51Chapter9BDATomaintainapricePsD+QProductionQuotasThegovernmentcanalsocausethepriceofagoodtorisebyreducingsupplyLimitationsoftaximedallionsinNewYorkCityLimitationofrequiredliquorlicensesforrestaurants52Chapter9ProductionQuotasThegovernmenBACSreducedbyA+BChangeinPS=A-CDeadweightloss=BCCSupplyRestrictionsQuantityPriceDP0Q0SS’PSQ1SupplyrestrictedtoQ1SupplyshiftstoS’&Q153Chapter9BACSreducedbyA+BCSupplyRSupplyRestrictionsIncentiveProgramsUSagriculturalpolicyusesproductionincentivesinsteadofdirectquotasGovernmentgivesfarmersfinancialincentivestorestrictsupplyAcreagelimitationprogramsQuantitydecreasesandpriceincreasesforthecrop54Chapter9SupplyRestrictionsIncentivePSupplyRestrictionsIncentiveProgramGaininPSofAfromincreasedpriceofamountsoldLossofPSofCfromdecreasedproductionGovernmentpaysfarmersnottoproduceTotalPS=A–C+paymentsfromGovt.GovernmentmustpayenoughtokeepproducersfromproducingmoreatthehigherpriceEqualsB+C+D55Chapter9SupplyRestrictionsIncentivePDBACSreducedbyA+BCSupplyRestrictionsQuantityPriceDP0Q0SS’Q1Costtogovernment=B+C+D=additionalprofitmadeifproducingQ0atPSPSChangeinPS=A+B+D56Chapter9DBACSreducedbyA+BCSupplySupplyRestrictionsWhichprogramismorecostly?BothprogramshavesamelosstoconsumersProducersareindifferentbetweenprogramsbecauseendupwithsameamountinbothTypically,acreagelimitationprogramscostsocietylessthanpricesupportsmaintainedbygovernmentpurchasesHowever,societyisbetteroffifgovernmentwouldjustgivefarmerscash57Chapter9SupplyRestrictionsWhichprogrSupportingthePriceofWheatFrompreviousexample,thesupplyanddemandforwheatin1981wasSupply:QS=1,800+240PDemand:QD=3,550-266PEquilibriumpriceandquantitywas$3.46and2,630millionbushelsGovernmentraisedthepriceto$3.70throughgovernmentpurchases58Chapter9SupportingthePriceofWheatFSupportingthePriceofWheatHowmuchwouldthegovernmenthavehadtobuytokeeppriceat$3.70?QDTotal=QD+Qg=3,550-266P+QgQS=QDT1,800+240P=3,550-266P+QgQg=506P-1,750Atapriceof$3.70,governmentwouldbuyQg=(506)(3.70)-175=122millionbushels59Chapter9SupportingthePriceofWheatHD+QgBybuying122millionbushels,thegovernmentincreasedthemarket-clearingprice.2,688ABCQgPS=$3.70ABconsumerlossABCproducergainSDP0=$3.462,6301,800TheWheatMarketin1981QuantityPrice2,56660Chapter9D+QgBybuying1222,688ABCQgPSupportingthePriceofWheatWecanquantifytheeffectsonCSThechangeinconsumersurplus=(-A-B)A=(3.70-3.46)(2,566)=$616millionB=(1/2)(3.70-3.46)(2,630-2,566)=$8millionCS=-$624million61Chapter9SupportingthePriceofWheatWSupportingthePriceofWheatCosttothegovernment:$3.70x122millionbushels=$451.4millionTotalcostofprogram=$624+451=$1,075millionGaintoproducersA+B+C=$638millionGovernmentalsopaid30cents/bushel=$806million62Chapter9SupportingthePriceofWheatCSupportingthePriceofWheatIn1985,thesituationbecameworseExportdemandfellandthemarketclearingpriceofwheatfellto$1.80/bushelEquilibriumquantitywas2231Theactualprice,however,was$3.20Tokeeppriceat$3.20,thegovernmenthadtopurchaseexcesswheatGovernmentalsoimposedaproductionquotaofabout2425millionbushels63Chapter9SupportingthePriceofWheatISupportingthePriceofWheat1985GovernmentPurchase:2,425=2,580-194P+QgQg=-155+194PP=$3.20--thesupportpriceQg=-155+194($3.20)=466millionbushels64Chapter9SupportingthePriceofWheat1TheWheatMarketin1985PriceQuantity1,800SDP0=$1.802,232Toincreasethepriceto$3.20,thegovernmentbought466millionbushelsandimposedaproductionquotaof2,425bushels.D+Qg1,959S’2,425PS=$3.20Qg65Chapter9TheWheatMarketin1985PriceQSupportingthePriceofWheat1985GovernmentCost:PurchaseofWheat=$3.20x466=$1,491million80centsubsidy=.80x2,425=$1,940millionTotalgovernmentprogramcost=$3.5billion66Chapter9SupportingthePriceofWheat1SupportingthePriceofWheatIn1996,CongresspassedtheFreedomtoFarmlawGoalwastoreducetheroleofgovernmentandmakeagriculturemoremarket-orientedEliminatedproductionquotas,graduallyreducedgovernmentpurchasesandsubsidiesthrough200367Chapter9SupportingthePriceofWheatISupportingthePriceofWheatIn2002,CongressandPresidentBushreversedtheeffectsofthe1996billbyreinstatingsubsidiesformostcropsCallsfor“fixeddirectpayments”Newbillwouldcosttaxpayersalmost$1.1billioninannualpaymentstowheatproducersalone2002farmbillexpectedtocosttaxpayers$190billionover10yearsEstimated$83billionoverexistingprograms68Chapter9SupportingthePriceofWheatIImportQuotasandTariffsManycountriesuseimportquotasandtariffstokeepthedomesticpriceofaproductaboveworldlevelsImportquotas:LimitonthequantityofagoodthatcanbeimportedTariff:TaxonanimportedgoodThisallowsdomesticproducerstoenjoyhigherprofitsCosttoconsumersishigh69Chapter9ImportQuotasandTariffsManyImportQuotasandTariffsWithlowerworldprice,domesticconsumershaveincentivetopurchasefromabroadDomesticpricefallstoworldpriceandimportsequaldifferencebetweenquantitysuppliedandquantitydemandedDomesticindustrymightconvincegovernmenttoprotectindustrybyeliminatingimportsQuotaofzeroorhightariff70Chapter9ImportQuotasandTariffsWithQSQDPWABCQuotaofzeropushesdomesticpricetoP0andimportsgotozero.ImportTarifftoEliminateImportsQuantityPriceQ0DP0SInafreemarket,thedomesticpriceequalstheworldpricePW.ImportsLosstoconsumersisA+B+C.GaintoproducersisA.Deadweightloss:B+C.71Chapter9QSQDPWABCQuotaofzeropushesImportTariff(GeneralCase)TheincreaseinpricecanbeachievedbyatariffQSincreasesandQDdecreasesAreaAisthegaintodomesticproducersThelosstoconsumersisA+B+C+DDWL=B+CGovernmentRevenueisD=tariff*importsDCBQSQDQ’SQ’DAP*PwQPDS72Chapter9ImportTariff(GeneralCase)ThImportQuota(GeneralCase)Ifaquotaisused,rectangleDbecomespartoftheprofitstoforeignproducersConsumersloseA+B+C+DProducersgainANetdomesticlossisB+C+DDCBQSQDQ’SQ’DAP*PwQPDS73Chapter9ImportQuota(GeneralCase)IfTheSugarQuotaExampleTheworldpriceofsugarhasbeenaslowas4centsperpound,whileintheU.S.thepricehasbeen20-25centsperpoundSugarquotashaveprotectedthesugarindustrybutdrivenuppricesDomesticproducershavebeenbetteroffandsohavesomeforeignproducersthathavequotarightsConsumersareworseoff74Chapter9TheSugarQuotaExampleTheworTheSugarQuotaExampleTheImpactofaSugarQuotain2001USproduction=17.4billionpoundsUSconsumption=20.4billionpoundsUSprice=21.5cents/poundWorldprice=8.3cents/poundPriceelasticityofUSsupply=1.5PriceelasticityofUSdemand=–0.375Chapter9TheSugarQuotaExampleTheImpImpactofSugarQuotaThedatacanbeusedtofittheUSsupplyanddemandcurvesQS=-8.70+1.21PQD=26.53-0.29PWorldpricewas24.2millionpounds,leadingtolittledomesticsupplyandmostdomesticconsumptioncomingfromlargeimportsGovernmentrestrictedimportsto3billionpoundsraisingpriceto21.5cents/pound76Chapter9ImpactofSugarQuotaThedataSugarQuotain1997CDBAThecostofthequotastoconsumerswasA+B+C+D=$2.4b.

ThegaintoproducerswasareaA=$1b.SUSDUSPrice(cents/lb.)48111620PW=8.3beforequotaPUS=21.5afterquotaQuantity(billionsofpounds)24.21.417.420.477Chapter9SugarQuotain1997CDBAThecosTheImpactofaTaxorSubsidyThegovernmentwantstoimposea$1.00taxonmovies.Itcandoittwoways:Maketheproducerspay$1.00foreachmovietickettheysellMakeconsumerspay$1.00whentheybuyeachmovieInwhichoptionareconsumerspayingmore?78Chapter9TheImpactofaTaxorSubsidyTheImpactofaTaxorSubsidyTheburdenofatax(orthebenefitofasubsidy)fallspartlyontheconsumerandpartlyontheproducerHowtheburdenissplitbetweenthepartiesdependsontherelativeelasticitiesofdemandandsupply79Chapter9TheImpactofaTaxorSubsidyTheEffectsofaSpecificTaxForsimplicitywewillconsideraspecifictaxonagoodTaxofaparticularamountperunitsoldFederalandstatetaxesongasandcigarettesForourexample,consideraspecifictaxof$tperwidgetsold80Chapter9TheEffectsofaSpecificTaxFBuyersloseA+BIncidenceofaSpecificTaxDSBDACQuantityPriceP0Q0Q1PSpriceproducersgetPb

pricebuyerspayTax=$1.00GovernmentgainsA+Dintaxrevenue.SellersloseD+CThedeadweightlossisB+C.81Chapter9BuyersloseA+BIncidenceofIncidenceofaSpecificTaxFourconditionsthatmustbesatisfiedafterthetaxisinplace:Quantitysoldandbuyer’sprice,Pb,mustbeonthedemandcurveBuyersonlyconcernedwithwhattheymustpayQuantitysoldandseller’sprice,PS,mustbeonthesupplycurveSellersonlyconcernedwithwhattheyreceive82Chapter9IncidenceofaSpecificTaxFouIncidenceofaSpecificTaxFourconditionsthatmustbesatisfiedafterthetaxisinplace(cont.):QD=QSDifferencebetweenwhatconsumerspayandwhatbuyersreceiveisthetaxIfweknowthedemandandsupplycurvesaswellasthetax,wecansolveforPB,PS,QDandQS83Chapter9IncidenceofaSpecificTaxFouIncidenceofaSpecificTaxInthepreviousexample,thetaxwassharedalmostequallybyconsumersandproducersIfdemandisrelativelyinelastic,however,burdenoftaxwillfallmostlyonbuyersCigarettesIfsupplyisrelativelyinelastic,theburdenoftaxwillfallmostlyonsellers84Chapter9IncidenceofaSpecificTaxInImpactofElasticitiesonTaxBurdensQuantityQuantityPricePriceSDSDQ0P0P0Q0Q1PbPStQ1PbPStBurdenonBuyerBurdenonSeller85Chapter9ImpactofElasticitiesonTaxTheImpactofaTaxorSubsidyWecancalculatethepercentageofataxbornebyconsumersusingpass-throughfractionES/(ES-Ed)Tellsfractionoftax“passedthrough”toconsumersthroughhigherpricesForexample,whendemandisperfectlyinelastic(Ed=0),thepass-throughfractionis1–consumersbear100%oftax86Chapter9TheImpactofaTaxorSubsidyTheEffectsofaTaxorSubsidyAsubsidycanbeanalyzedinmuchthesamewayasataxPaymentreducingthebuyer’spricebelowtheseller’spriceItcanbetreatedasanegativetaxTheseller’spricee