Beruflich Dokumente
Kultur Dokumente
Implicit Taxation
• Government intervention in the form of price
controls can be viewed as a combination tax and
Taxation by another name subsidy.
• A price ceiling is an implicit tax on producers and
an implicit subsidy to producers that causes a
7-4 Price Control welfare loss identical to the loss from taxation.
• A price floor is a tax on consumers and a subsidy
for producers that transfers consumer surplus to
producers.
1
Price Floors Effect of a Price Floor
• A price floor is a government-set price Consumer
Price
above equilibrium price. surplus
• It is a tax on consumers and a subsidy to A Price floor S
P1
producers.
B C
• Price floors transfer consumer surplus to P0
D E Welfare loss
producers. F Transferred to
producers
Producer D
surplus
Q1 Q0 Quantity
2
Rent Seeking, Politics,
Effect of a Draft on Surplus
and Elasticities
• Price controls reduce total producer and
Wage S consumer surpluses.
Deadweight loss • Governments institute them because
caused by draft people care more about their own surplus
We
Surplus transferred to than about total surplus.
the government
W0 • Individuals spend money to lobby
governments to institute policies that
D increase their own surplus.
surplus
QS QD=Draft
Quantity of soldiers
3
Inelastic Demand & Producing Inelastic Demand and
more Incentives to Restrict Supply
Price S0 Price S0
P0 P0
Revenue lost S1
S1 Revenue gained
P1 Revenue gained P1
Revenue lost
QD QS Q QD QS Q
4
The Long-Run/Short-Run The Long-Run/Short-Run
Problem of Price Controls Problem of Price Controls
• The problem of price controls worsen from • In the short run there will be small effects
the short run to the long run. from the price controls.
• In the long run, supply and demand tend
to be much more elastic than in the short • There will be huge effects in the long run.
run.
5
Long-Run and Short-Run
Elasticities Summary
• Consumer surplus is the net benefit a consumer gets
P Short run
supply from purchasing a good.
Long run • Producer surplus is the net benefit a producer gets
supply
P1 from selling a good.
P2 Larger long-run • Equilibrium maximizes the combination of consumer
elasticities result and producer surplus.
P0 in smaller price
increases when • Taxes create a loss of consumer and producer
D1 demand increases.
surplus known as deadweight loss, which is
D0 graphically represented by the welfare loss triangle.
Q0 Q1 Q2 Q3 Q
Summary Summary
• The cost of taxation to consumers and producers • Price ceilings and floors, like taxes, result in loss of
includes the actual tax paid, the deadweight loss, consumer and producer surplus.
and the costs of administering the tax. • Price ceilings transfer producer surplus to
consumers; they are a tax on producers and a
• Government follows both the benefit principle and subsidy to consumers.
the ability-to-pay principle when deciding on whom • Price floors transfer consumer surplus to
to levy taxes. producers; they are a tax on consumers and a
• Relative elasticities determine who bears the subsidy to producers.
burden of the tax. The more inelastic one’s • The more elastic supply and/or demand is, the
demand or supply, the larger the burden of the tax. greater the surplus with an effective price floor and
the greater the shortage is with an effective price
ceiling.
6
Review Question 7-2 Given the following demand and
Review Question 7-1 Given the following demand and
supply of pizza, show the effects of a price floor at $8.
supply of pizza, find consumer and producer surplus.