C h a p t e r f o u r © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn

c h a p t e rc h a p t e rf o u rf o u r

© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed.

Prepared by: Fernando & Yvonn Quijano

Economic Efficiency, GovernmentPrice Setting, and Taxes

2 of 29© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed.

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esEconomic Efficiency, Government Price Setting, and Taxes

Price ceiling A legally determined maximum price that sellers may charge.

Price floor A legally determined minimum price that sellers may receive.


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esConsumer Surplus and Producer Surplus

Consumer Surplus4 - 2

Total Consumer Surplus in theMarket for Chai Tea


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Producer Surplus

Producer surplus The difference between the lowest price a firm would have been willing to accept and the price it actually receives.

Marginal cost The additional cost to a firm of producing one more unit of a good or service.

4 - 3Producer Surplus


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What Consumer Surplus and Producer Surplus Measure

Consumer surplus measures the benefit to consumers from participating in a market, and producer surplus measures the benefit to producers from participating in a market.


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esThe Efficiency of Competitive Markets

Economic Surplus 4 - 5Economic Surplus Equals the Sum of Consumer Surplus and Producer Surplus


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Deadweight Loss4 - 6

When a Market Is Not in Equilibrium There is a Deadweight Loss

Deadweight loss The reduction in economic surplus resulting from a market not being in competitive equilibrium.


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Economic Surplus and Economic Efficiency

Economic efficiency A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and where the sum of consumer surplus and producer surplus is at a maximum.


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esLEARNING OBJECTIVE3

4 - 7

The Economic Effect of a Price Floor in the Wheat Market

Government Intervention in the Market:Price Floors And Price Ceilings

Price Floors: The Example of Agricultural Markets


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Price Floors in Labor Markets: The Minimum Wage

4 - 2

Many economists believe there are better policies than the minimum wage for raising the incomes of low-skilled workers.


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esGovernment Intervention In The Market:

Price Floors And Price Ceilings

Price Ceilings: The Example of Rent Controls

4 - 8

The Economic Effect of a Rent Ceiling

Don’t Confuse “Scarcity” with a “Shortage.”


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esGovernment Intervention In The Market:

Price Floors And Price Ceilings

Black Markets

Black markets Buying and selling at prices that violate government price regulations.


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esThe Economic Impact of Taxes

LEARNING OBJECTIVE4

The Effect of Taxes on Economic Efficiency4 - 9

The Effect of a Tax on the Market for Cigarettes


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Tax Incidence: Who Actually Pays a Tax?

Tax incidence The actual division of the burden of a tax between buyers and sellers in a market.


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4 - 10The Incidence of a Tax on Gasoline

DETERMINING TAX INCIDENCE ON A DEMAND AND SUPPLY GRAPH


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When Do Consumers Pay All of a Sales Tax Increase?

4 - 2

LEARNING OBJECTIVE4


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esThe Economic Impact Of Taxes


4 - 11The Incidence of a Tax on Gasoline Paid by Buyers

DOES IT MATTER WHETHER THE TAX IS ON BUYERS OR SELLERS?


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Black market

Consumer surplus

Deadweight loss

Economic efficiency

Economic surplus

Marginal benefit

Marginal cost

Price ceiling

Price floor

Producer surplus

Tax incidence


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esAppendix 4A:

Quantitative Demand and Supply Analysis

4A-1

Graphing Supply and Demand Equations

After statistically estimating supply and demand equations, we can use the equations to draw supply and demand curves.

QD = 3,000,000 – 1,000P

QS = – 450,000 + 1,300P

QD = QS

Demand and Supply Equations

500,1$300,2

000,450,3P


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4A-2

Calculating the Economic Effect of Rent Controls

CONSUMER SURPLUS

PRODUCER SURPLUS

DEADWEIGHT LOSS

COMPETITIVE EQUILIBRIUM $1,125 $865.50 $0

RENT CONTROL $1,338.75 $278 $373.75

Appendix 4A: Quantitative Demand and Supply Analysis

Calculating Consumer Surplus and Producer Surplus

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C h a p t e r f o u r © 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed. Prepared by: Fernando & Yvonn