1、,Chapter 9,The Analysis of Competitive Markets,1,Chapter 1,Topics to be Discussed,Evaluating the Gains and Losses from Government Policies-Consumer and Producer SurplusThe Efficiency of a Competitive MarketMinimum Prices,2,Chapter 1,Topics to be Discussed,Price Supports and Production QuotasImport Q
2、uotas and TariffsThe Impact of a Tax or Subsidy,3,Chapter 1,Evaluating the Gains and Losses fromGovernment Policies-Consumer and Producer Surplus,ReviewConsumer surplus is the total benefit or value that consumers receive beyond what they pay for the good.Producer surplus is the total benefit or rev
3、enue that producers receive beyond what it cost to produce a good.,4,Chapter 1,ConsumerSurplus,Consumer and Producer Surplus,Quantity,0,Price,S,D,5,Chapter 1,To determine the welfare effect of a governmental policy we can measure the gain or loss in consumer and producer surplus.Welfare EffectsGains
4、 and losses caused by government intervention in the market.,Evaluating the Gains and Losses fromGovernment Policies-Consumer and Producer Surplus,6,Chapter 1,Change in Consumer andProducer Surplus from Price Controls,Quantity,Price,7,Chapter 1,Observations:The total loss is equal to area B+C.The to
5、tal change in surplus=(A-B)+(-A-C)=-B-CThe deadweight loss is the inefficiency of the price controls or the loss of the producer surplus exceeds the gain from consumer surplus.,Change in Consumer andProducer Surplus from Price Controls,8,Chapter 1,ObservationConsumers can experience a net loss in co
6、nsumer surplus when the demand is sufficiently inelastic,Change in Consumer andProducer Surplus from Price Controls,9,Chapter 1,Effect of Price ControlsWhen Demand Is Inelastic,Quantity,Price,10,Chapter 1,Price Controls and Natural Gas Shortages,1975 Price controls created a shortage of natural gas.
7、What was the deadweight loss?,11,Chapter 1,Supply:QS=14+2PG+0.25POQuantity supplied in trillion cubic feet(Tcf)Demand:QD=-5PG+3.75POQuantity demanded(Tcf)PG=price of natural gas in$/mcf and PO=price of oil in$/b.,Price Controls and Natural Gas Shortages,Data for 1975,12,Chapter 1,PO=$8/bEquilibrium
8、PG=$2/mcf and Q=20 TcfPrice ceiling set at$1This information can be seen graphically:,Price Controls and Natural Gas Shortages,Data for 1975,13,Chapter 1,2.00,Quantity(Tcf),0,Price($/mcf),5,10,15,20,25,30,Price Controls and Natural Gas Shortages,14,Chapter 1,Measuring the Impact of Price Controls1 T
9、cf=1 billion mcfIf QD=18,then P=$2.40 18=-5PG+3.75(8)A=(18 billion mcf)x($1/mcf)=$18 billionB=(1/2)x(2 b.mcf)x($0.40/mcf)=$0.4 billionC=(1/2)x(2 b.mcf)x($1/mcf)=$1 billion,Price Controls and Natural Gas Shortages,15,Chapter 1,Measuring the Impact of Price Controls1975Change in consumer surplus=A-B=1
10、8-0.04=$17.6 billionChange in producer surplus=-A-C=-18-1=-$19.0 billion,Price Controls and Natural Gas Shortages,16,Chapter 1,Measuring the Impact of Price Controls1975 dollars,deadweight loss=-B-C=-0.4-1=-$1.4 billionIn 2000 dollars,the deadweight loss is more than$4 billion per year.,Price Contro
11、ls and Natural Gas Shortages,17,Chapter 1,The Efficiency ofa Competitive Market,When do competitive markets generate an inefficient allocation of resources or market failure?1)ExternalitiesCosts or benefits that do not show up as part of the market price(e.g.pollution),18,Chapter 1,The Efficiency of
12、a Competitive Market,When do competitive markets generate an inefficient allocation of resources or market failure?2)Lack of InformationImperfect information prevents consumers from making utility-maximizing decisions.,19,Chapter 1,Government intervention in these markets can increase efficiency.Gov
13、ernment intervention without a market failure creates inefficiency or deadweight loss.,The Efficiency ofa Competitive Market,20,Chapter 1,Welfare Loss When PriceIs Held Below Market-Clearing Level,Quantity,Price,21,Chapter 1,Welfare Loss When PriceIs Held Above Market-Clearing Level,Quantity,Price,2
14、2,Chapter 1,The Market for Human Kidneys,The 1984 National Organ Transplantation Act prohibits the sale of organs for transplantation.Analyzing the Impact of the ActSupply:QS=8,000+0.2PIf P=$20,000,Q=12,000Demand:QD=16,000-0.2P,23,Chapter 1,The Market for Kidneys,and Effectsof the 1984 Organ Transpl
15、antation Act,Quantity,Price,8,000,4,000,0,$10,000,$30,000,$40,000,24,Chapter 1,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.,The Market for Human Kidneys,25,Chapter 1,Gain to recipients:A-B=(8,000)($20,000)-(1/2)(4
16、,000)($20,000)=$120/m.Deadweight loss:B+C or$200 million-$120 million=$80 million,The Market for Human Kidneys,26,Chapter 1,Other Inefficiency Cost1)Allocation is not necessarily to those who value the kidneys the most.2)Price may increase to$40,000,the equilibrium price,with hospitals getting the p
17、rice.,The Market for Human Kidneys,27,Chapter 1,Arguments in favor of prohibiting the sale of organs:1)Imperfect information about donors health and screening,The Market for Human Kidneys,28,Chapter 1,Arguments in favor of prohibiting the sale of organs:2)Unfair to allocate according to the ability
18、to payHolding price below equilibrium will create shortagesOrgans versus artificial substitutes,The Market for Human Kidneys,29,Chapter 1,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 mini
19、mum wage.,30,Chapter 1,Price Minimum,Quantity,Price,31,Chapter 1,The Minimum Wage,L,w,32,Chapter 1,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
20、entered the industry.,33,Chapter 1,Effect of Airline Regulationby the Civil Aeronautics Board,Quantity,Price,34,Chapter 1,Airline Industry Data,Number of carriers337286608696Passenger load factor(%)545961626769Passenger-mile rate(constant 1995 dollars).218.210.166.150.129.126Real cost index(1995=100
21、)10112211110710099Real cost index corrected for fuel cost increases94989810010098,197519801985199019951996,35,Chapter 1,Airline Industry Data,Airline industry data show:1)Long-run adjustment as the number of carriers increased and prices decreased2)Higher load factors indicating more efficiency,36,C
22、hapter 1,Airline Industry Data,Airline industry data show:3)Falling rates4)Real cost increased slightly(adjusted fuel cost)5)Large welfare gain,37,Chapter 1,Price Supports andProduction Quotas,Much of agricultural policy is based on a system of price supports.This is support price is set above the e
23、quilibrium price and the government buys the surplus.This is often combined with incentives to reduce or restrict production,38,Chapter 1,Price Supports,Quantity,Price,39,Chapter 1,B,A,Price Supports,Quantity,Price,S,D,P0,Q0,Ps,Q2,Q1,The cost to the government is the speckled rectanglePs(Q2-Q1),D,To
24、talWelfareLoss,Total welfare lossD-(Q2-Q1)ps,40,Chapter 1,Price Supports,Question:Is there a more efficient way to increase farmers income by A+B+D?,41,Chapter 1,Production QuotasThe government can also cause the price of a good to rise by reducing supply.,Price Supports andProduction Quotas,42,Chap
25、ter 1,What is the impact of:1)Controlling entry into the taxicab market?2)Controlling the number of liquor licenses?,Price Supports andProduction Quotas,43,Chapter 1,Supply Restrictions,Quantity,Price,44,Chapter 1,B,A,C,D,Supply Restrictions,Quantity,Price,45,Chapter 1,Supply Restrictions,=A-C+B+C+D
26、=A+B+D.The change in consumer and producer surplus is the same as with price supports.=-A-B+A+B+D-B-C-D=-B-C.,46,Chapter 1,Supply Restrictions,Questions:How could the government reduce the cost and still subsidize the farmer?Which is more costly:supports or acreage limitations?,47,Chapter 1,Supporti
27、ng the Price of Wheat,1981Supply:Qs=1,800+240PDemand:QD=3,550-266PEquilibrium price and quantity was$3.46 and 2,630 million bushels,48,Chapter 1,Supporting the Price of Wheat,1981Price support was set at$3.70QD+QG=QDT=3,440-266P+QGQS=QD1,800+240P=3,550-266P+QGQG=506P-1,750QG=(506)(3.70)-175=122 mill
28、ion bushels,49,Chapter 1,The Wheat Market in 1981,Quantity,Price,50,Chapter 1,Supporting the Price of Wheat,1981The change in consumer surplus=(-A-B)A=(3.70-3.46)(2,566)=$616 millionB=(1/2)(3.70-3.46)(2,630-2,566)=$8 millionChange in consumer surplus:-$624 million.,51,Chapter 1,Supporting the Price
29、of Wheat,1981Cost to the government:$3.70 x 122 million bushels=$452 millionTotal cost=$624+452=$1,076 millionTotal gain=A+B+C=$638 millionGovernment also paid 30 cents/bushel=$806 million,52,Chapter 1,Supporting the Price of Wheat,In 1985,export demand fell and the market clearing price of wheat fe
30、ll to$1.80/bushel.,53,Chapter 1,Supporting the Price of Wheat,1985 Supply:QS=1,800+240P1986 Demand:QD=2580-194PQS=QD at$1.80 and 2,232 million bushelsPS=$3.20 To maintain$3.20/bushel a production quota of 2,425 bushels was imposed,54,Chapter 1,Supporting the Price of Wheat,1985Government Purchase:2,
31、425=2,580-194P+QGQG=-155+194PP=$3.20-the support priceQG=-155+194($3.20)=466 million bushels,55,Chapter 1,The Wheat Market in 1985,Quantity,Price,56,Chapter 1,Supporting the Price of Wheat,1985Government Purchase:Government cost=$3.20 x 466=$1,491million80 cent subsidy=.80 x 2,425=$1,940 millionTota
32、l cost=$3.5 billion,57,Chapter 1,Supporting the Price of Wheat,Question:What is the change in consumer and producer surplus?,58,Chapter 1,Supporting the Price of Wheat,1996 Freedom to FarmReduces price supports and quotas until 2003 when they go back into effect under the 1996 law.,59,Chapter 1,Supp
33、orting the Price of Wheat,1998 Wheat MarketP=$2.65QD=3244-283PQS=1944+207PQ=2493Government subsidy of.66/bushel or$1.6 billion,60,Chapter 1,Import Quotas and Tariffs,Many countries use import quotas and tariffs to keep the domestic price of a product above world levels,61,Chapter 1,Import Tariff or QuotaThat Eliminates Imports,Quantity,Price,How high would a tariff haveto be to get the same result
