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Lecture 5(i) Announcements
Midterm Covers through Lec5(ii) Practice midterm at Moodle (look at it before recitation sections this week) Question and Answer Sessions Wed: 4-5:30pm (Anderson 210) Wed: 7:30-9pm (Blegen 5) Thur: 3:30-5pm (Anderson 210)
My Office Hours This Week
o Wed 1:30-3:25 (usual) o Thur: 1:30-2:30 (extra)
Large Lectures (Wiley 175) cancelled this Friday. Next Mon (Oct 12), go to evening midterm, 7-8pm instead of lecture. Rooms posted later today Bring #2 pencils and University ID Don’t Bring: Calculators and Scratch Paper.
Lecture
1. More on marginal tax rates 2. Price Controls
Key Principle in Economics: Look at Incentives at the Margin That’s where the decision making is taking place Last Class: “Name Tax” S1,S2,S3, D1,D2,D3 each pay $2 Key thing: D4, D5, S4, S5 decision making not distorted. These are the marginal units affected by the tax. “Name Tax” a metaphor for policies to give tax breaks at the margin, (e.g. real estate tax break for some new business that wouldn’t open “but for” the break.)
When talking about incentive effects of taxes on labor, we look at the
marginal tax tate Rate paid on last dollar earned. Key rate used in decision making about how much to work.
Come back to example of the students. Talked about payroll tax (social security and medicare)
How collected? 7.65% taken out of worker paycheck
subtract from wage to get PS
7.65% collected from firm
add to wage to get PD
But who bears the burden of the tax? Depends
elasticity of supply elasticity of demand
Suppose demand and supply for student labor looks like this
_______ bears burden of social
security tax Good arguments that labor demand is highly elastic (for most workers). So we will go with this.
Q
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With the big spread between taxes on earned income and capital gains, there is an incentve to reclassify earned income into capital gains. Biggest story in news about that? “Carried Interest” in compensation of elite fund managers Trump plan: Get rid of “carried interest” loophole But lower top marginal rate for earned income to 25%!
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2. Price Controls Price Ceiling Pceiling
Regulation: P ≤ Pceiling Examples?
Price Floor Pfloor
Regulation: P ≥ Pfloor Examples?
Key point: With price controls market quantity is minimum of supply and demand. Binding price ceiling
→ Excess Demand
Binding price floor
→ Excess Supply
Lo U A
ook
Uber
Also h
at th
has
has
he M
s a u
“sur
Mark
sua
rge p
ket fo
l far
prici
or U
e fo
ng”
ber
r an
Ride
are
es
a.
Market For Rides in Nightlife Area
Ban surge pricing altogether? Bill introduced in New York legislature
Q
$
D9PM
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Outcome: Still have surge pricing for everyday kinds of things If a natural disaster, put a cap (equal to some highest rate past month) Also, Uber donates money it gets during disasters to a charity. Good politics
ImPLato
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aw io sel
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onsuin E
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umerEcond: Ilmor
r Sunlandlegare th
rplud al forhan $
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r any$3.
f
yonee
At ceiling price of $3: QD =7 QS = 3 QCeiling = minimum of QD and QS
= 3
Producer Surplus easy to calculate (All sellers who want to sell are able to sell). So we use normal rule of calculating area under the PS line (the price producers get) and above the supply curve. Easy to calculate ∆PS
C
Channge in PS
S froom $$3 ceeiling
What is CS? It depends There are 7 people who want a widget (D1, D2, D3, D4, D5, D6, D7), but only 3 are for sale. CS depends on who gets the widgets because they differ in willingness to pay.
C
N
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wid
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OT
gets
der t
T T
s con
the
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nsum
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ot 7!
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CS =
Extrectly est vets (
___
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e: Caciene cooning
__
ase nt Raonsug go
1 ationmer
oes t
ning rs getheir
et ther way
e y)
For this extreme case, how does consumer surplus compare with its level in the free market? Lesson: What about overall total surplus?
OPLow
C
OppoPerfe
owewidge
CS =
ositeectly est Vet ge
___
ExtInef
Valueet it.
____
tremfficiee Co CS
__
me: Cent RonsuS is m
CaseRatioumermuc
e 2 oninrs thch lo
g hat wowe
want r!
Something in between? Uniform Rationing (likelihood of getting good unrelated to willingness to pay) What if D2, D4, and D6 get widget?
CCS =
Cas
___
se 3:
____
: Un
_
iformm Raationning
Rex
Reviexper
ew prime
priceent fr
e ceirom
ling last
in At wee
Aplia ek.
Rationing in ApliaLand What case is most relevant?