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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 1 of 28
MARKET EFFICIENCY
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 2 of 28
Consumer and Producer Surplus in the Market
Equilibrium
•Price •A
•D
•Supply
Chapter 9: The Analysis of Competitive Markets
•Consumer
•surplus
•Equilibrium •E
•price
•Producer
•surplus
•Demand
•B
•C
•0 •Equilibrium •Quantity
•quantity
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 3 of 28
•Copyright©2003 Southwestern/Thomson Learning
9.1 EVALUATING THE GAINS AND LOSSES
FROM GOVERNMENT POLICIES—
CONSUMER AND PRODUCER SURPLUS
Review of Consumer and Producer Surplus
Figure 9.1
Consumer and Producer
Chapter 9: The Analysis of Competitive Markets
Surplus
Consumer A would pay $10
for a good whose market
price is $5 and therefore
enjoys a benefit of $5.
Consumer B enjoys a benefit
of $2,
and Consumer C, who values
the good at exactly the
market price, enjoys no
benefit.
Consumer surplus, which
measures the total benefit to
all consumers, is the yellow-
shaded area between the
demand curve and the
market price.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 4 of 28
9.1 EVALUATING THE GAINS AND LOSSES
FROM GOVERNMENT POLICIES—
CONSUMER AND PRODUCER SURPLUS
Review of Consumer and Producer Surplus
Figure 9.1
Consumer and Producer
Chapter 9: The Analysis of Competitive Markets
Surplus (continued)
Producer surplus measures
the total profits of producers,
plus rents to factor inputs.
It is the benefit that lower-
cost producers enjoy by
selling at the market price,
shown by the green-shaded
area between the supply
curve and the market price.
Together, consumer and
producer surplus measure
the welfare benefit of a
competitive market.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 5 of 28
Efficiency in the market equilibrium
surplus.
•Market failure Situation in which an
unregulated competitive market is
inefficient because prices fail to provide
proper signals to consumers and
producers.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 6 of 28
Evaluating the impacts of government
intervention
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 7 of 28
9.1 EVALUATING THE GAINS AND LOSSES
FROM GOVERNMENT POLICIES—
CONSUMER AND PRODUCER SURPLUS
Application of Consumer and Producer Surplus
● welfare effects Gains and losses to consumers and
producers.
Chapter 9: The Analysis of Competitive Markets
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 12 of 28
9.4 PRICE SUPPORTS AND PRODUCTION QUOTAS
Price Supports
● price support Price set by government above free market level and
maintained by governmental purchases of excess supply.
Prince Supports
Chapter 9: The Analysis of Competitive Markets
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 13 of 28
PRICE SUPPORT: MATHEMATICAL
EXAMPLE
1981 Supply of rice: QS = 1800 + 240P
1981 Demand for rice: QD = 3550 - 266P
Price Quotas
Figure 9.11
Supply Restrictions
To maintain a price Ps above the
market-clearing price P0, the
Chapter 9: The Analysis of Competitive Markets
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 15 of 28
9.5 IMPORT QUOTAS AND TARIFFS
● import quota Limit on the quantity of a good that can be
imported.
● tariff Tax on an imported good.
Figure 9.14
Chapter 9: The Analysis of Competitive Markets
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 16 of 28
9.5 IMPORT QUOTAS AND TARIFFS
Figure 9.15
Pw to P*.
This can be achieved by a
quota, or by a tariff T = P* − Pw.
Trapezoid A is again the gain to
domestic producers.
The loss to consumers is A + B
+ C + D.
If a tariff is used, the
government gains D, the
revenue from the tariff. The net
domestic 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.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 17 of 28
MATHEMATICAL EXAMPLE ON TARIFF
U.S. supply: QS = -7.48
+ 0.84P
U.S. demand: QD =
26.7 - 0.23P
Price was initially 12
cents/pound.
Government has
imposed a tariff of 15
cents/pound. Show the
change in consumer
surplus, producer
surplus, government
revenue gain and DWL
according to new tariff.
IMPACT OF TAX
Who really pays these
taxes?
Income tax (Direct tax) -
deducted from your pay,
GST (Indirect tax) -
added to the price of
most things you buy
Direct tax reduces the
buying power of the
individuals and thus
shifts the demand curve
to the left.
INCIDENCE OF INDIRECT TAX
Figure shows the effects of
this tax.
With no tax: Equil. price =
$3.00 a packet
With tax on sellers of $1.50 a
packet
Indirect tax amount equals
the vertical distance between
two supply curves
The market price paid by
buyers rises to $4.00 a packet
and the quantity bought
decreases.
The price received by the
sellers falls to $2.50 a packet.
Let’s see the change in
consumer and producer
surplus and DWL.
INEFFICIENCY CREATED BY INDIRECT TAX
Tax revenue takes part of the total surplus.
The decreased quantity creates a deadweight loss
MATHEMATICAL EXAMPLE ON INDIRECT
TAX
Demand equation is Q = 9 –P
Supply equation is Q = -1 + P
Government has imposed an indirect tax of 2
Taka on the product. Find the new equilibrium,
change in consumer and producer surplus and
amount of government revenue and DWL.
First convert the Supply equation to: P =1 + Q
And Demand equation to: P = 9 -Q .
9.6 THE IMPACT OF A TAX OR SUBSIDY
● specific tax Tax of a certain amount of money per unit sold.
Figure 9.17
Incidence of a Tax
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 23 of 28
A Tax on Buyers
A tax on
buyers shifts Effects of a $1.50 per
the D curve unit tax on buyers
down by the P
amount of the S1
PB = $11.00
tax. Tax
$10.00
The price PS = $9.50
buyers pay
rises, the D1
price sellers D2
receive falls, Q
equilibrium Q 430 500
falls.
SUPPLY, DEMAND, AND GOVERNMENT POLICIES
The Incidence of a Tax:
How the burden of a tax is shared among market
participants
P
As a result of S1
PB = $11.00
the tax, Tax
buyers pay $10.00
$1.00 more, PS = $9.50
and sellers
receive D1
$0.50 less. D2
Q
430 500
QS = QS(Ps) (9.2b)
QD = QS (9.3c)
Ps − P b = s (9.4d)
Figure 9.19
Subsidy
A subsidy can be thought of
as a negative tax. Like a tax,
the benefit of a subsidy is
split between buyers and
sellers, depending on the
relative elasticities of supply
and demand.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 29 of 28
The Effects of a Tax
With no tax, •P
eq’m price is PE
and quantity is QE .
•Size of tax = $T
Govt imposes a
Chapter 9: The Analysis of Competitive Markets
CS = A + B + C
PS = D + E + F •A
Chapter 9: The Analysis of Competitive Markets
Tax revenue = 0 •S
•B •C
Total surplus •P
= CS + PS E •D •E
=A+B+C •D
•F
+D+E+F
•Q
•Q •Q
T E
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 31 of 28
The Effects of a Tax
With the tax, •P
CS = A
PS = F
•A
Chapter 9: The Analysis of Competitive Markets
Tax revenue •P •S
=B+D B •B •C
Total surplus •D •E
=A+B •P •D
+D+F S •F
The tax causes
total surplus to
•Q
fall by C + E •Q •Q
T E
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 32 of 28
The Effects of a Tax
•P
C + E is called the
deadweight loss
(DWL) of the tax, •A
Chapter 9: The Analysis of Competitive Markets
•P •S
the fall in total
B •B •C
surplus that
results from a •D •E
market distortion, •P •D
such as a tax. S •F
•Q
•Q •Q
T E
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 33 of 28
Revenue and the Size of the Tax
•Tax
revenue
The Laffer curve
shows the relationship •The Laffer
between curve
Chapter 9: The Analysis of Competitive Markets
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 8e. 34 of 28