3 Micro (Fach) / 1.5 Intervention to Competitive Markets (Lektion)
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- Economics of Tax CS Lower PS Lower Positive Tax Revenues to Government BUT Tax receipts less than the reduction in CS and PS There will be a DWL The Tax Wedge: P paid by buyers > P received by sellers Incidence of tax depends on the relative elasticities of demand and supply: Who pays the tax from a legal incidence doesn't change economic implication of tax Elasticity = Escape The more elastic group pays less [ the more inelastic goods cause lower DWL ] i.e. If demand is more elastic than Supply, suppliers pay a greater share of the tax, vice versa Seller pay Tax: Tax increases Costs -> Supply Curve Shifts up -> Price goes up, Q goes down [ Buyers pay more, Sellers receive less] Buyers pay Tax: Tax decreases WTP to Sellers -> Demand Curve shifts down -> Price stays the Same, Q goes down
- Economics of Price Controls CS Ambiguous [ depends on who gets the units ] Those who get units benefit and others are hurt. PS lower There will be a DWL Market output is below the efficient level Equilibrium P > Current P Shortage: Q Demanded > Q Supplied Buyers cannot signal their demand by bidding P up. Instead of bidding up the price, people pay with time waiting in wasteful lines If they pay with price, supplier gets the money. Time, on the other hand, is wasted Consequences Quality Reduction: Sellers can cut their costs and will still have Buyers Service ReductionsGasoline stations closed shop because they wanted to take break Waste: Price Controls of Chicken but not on their feed: Farmers were not making profit on feeding chicken and started to drown them Factories may have to close: If problems to drill oil in some regions, there is no incentive to sell oil where it is sold high (where it is difficult to drill oil
- Economics of Import Tariffs CS lower than with free trade PS Domestic higher The government collects revenue from tariff DWL is even larger with a quota. => A quota leads to same effects on CS, PS, and DWL without tariff revenue. => Tariffs are taxes that make US businesses less competitive and US consumers poorer
- Market Clearing vs. Non-Market Clearing effects No Excess Demand / Supply: Tax: CS ⇓ l PS ⇓ l Gov. Revenue ⇑ Subsidy: CS ⇑, PS ⇑, but DWL as Government Cost is higher ⇓ Import tariffs l Quotas: CS ⇓ Domestic PS ⇑ Excess l Shortages Price Ceiling: CS Amb. effect ⇒ l PS ⇓ Excess Demand Price Floor: CS ⇓ l PS Amb. effect Excess Supply Production Quota: CS ⇓ l PS Amb. effect l Q Limited ⇓ Excess Supply