Lecture #2. Government intervention in the market

Transcription

1 Lecture #2 Government intervention in the market

2 What will be covered taxes quantity tax value tax tax on profit lump-sum tax subsidies quantity restrictions tariffs examples: the olish `gambling scandal, EU CA

3 uantity tax (e.g. excise tax) imposed on an industry (pure competition) 2 = 1 + t 1 d t 1 s 2 1 q

4 uantity taxes and subsidies odatek tax jednostkowy ubsydium subsidy jednostkowe d * t (podatek) s * s (subsydium) s d ' * * ' d > * > s; d = s + t ' < *; d = s = ' s > * > d; s = d + s ' > *; d = s = '

5 Taxes and ocial Welfare d * s A B F C E A consumer surplus with tax imposed B consumer surplus lost to the government because of tax C deadweight loss of consumer surplus F producer surplus with tax imposed producer surplus lost to the government because of tax E deadweight loss of producer surplus ' * B+ tax revenues of the government C+E deadweight loss in social welfare resulting from the tax

6 o are quantity taxes harmful? any tax disturbs the initial market equilibrium affecting welfare taxes may be the only way to provide for certain public goods (so we may ask which tax will be least costly ) additionally, taxes may actually correct economic incentives and lead to efficiency gains (e.g. in the case of externalities)

7 ubsidies and ocial Welfare s * d A B F C E G A+B consumer surplus before the introduction of the subsidy +E gain in consumer surplus with subsidy F+ producer surplus before the introduction of the subsidy B+C gain in producer surplus with subsidy * ' B+C++E+G government spending on subsidies

8 Elasticity and splitting the tax burden t 0 0 t

9 uantity tax with a monopoly 1 0 MC + t t = AR MC MR 1 0

10 rice effect of taxes in a monopoly price increase resulting from the tax depends on elasticity of demand this price increase may be higher or lower than the tax itself (while in a purely competitive market introduction of a tax cannot result in a price increase higher than the tax rate) monopoly profits decrease as a result of introducing a tax

11 Value (ad valorem) tax, VAT d = s (1+t)

12 Example: `gambling scandal (L) the new surcharge shall be financially neutral for firms from the gambling industry, the role of which should be limited to collecting the 10% surcharge and transmitting it to the tate Treasury (quite unlikely ) the media suggest that resignation from surcharges would cost the budget 500 milion zloty (the product of simple multiplication)

13 Indeed a loss? gambling is already a source of budget revenue tax on gambling, CIT and IT imposed on winners experience shows that demand is relatively elastic (i.a. potential substitution by illegal gambling) so the actual revenue may decrease!

14 Tax on profits and lump-sum taxes following the introduction of the tax the firm is left with some share of profits (in %) or profits decreased by a constant so the firm anyway aims to maximize beforetax profits no inefficiency! (This is a static approach. In a dynamic setting incentives to establish firms and invest will diminish.)

15 Minimum and maximum price nadwyżka surplus min * * max niedobór deficit d * s s * d if min > * then s > d The market is in disequilibrium If max < * then s < d The market is in disequilibrium

16 Minimum price with government buying out the surplus s 0 A B C=-A-B =A+B+ G=-B--E E=-E-B E 1 0 2

17 uantity restriction (quota) ' ' * ' *

18 Voluntary quantity restriction A B C C = - A - B = A - C E = - B - C 1 0

19 uantity restriction with the government supporting the producers A C B C = -A - B = A-C +C+B+ G= -C-B- E = - B C 1 0

20 Tariffs, quantity restrictions in import In a purely competitive market the domestic price is set at the world price level W. 0 W A B C Import Import prohibited C=- A-B-C = A E=- B -C 0

21 Tariffs increases, decreases (domestic) = A C = - A - B - C G = E = -B - C * w A B C

22 utting it all together: Common Agricultural olicy absorbs ca. 40% of the EU budget (ca. 50 billion euro) most important components: import tariffs import quotas (i.a. for former colonies) guaranteed prices/intervention buying direct payments quotas (milk, wine, etc.)

23 (adverse) effects subsidies and maintaining relatively high price levels lead to overproduction, which the EU must buy out in 2007 the EU stored tons of grain, rice, sugar and milk products, as well as hectoliters of wine and other alcohol high food prices cost a typical family ca euro per year

24 (adverse) effects contd. misallocation of resources: production of linen in pain and ortugal fraud: olive-tree models in Italy Chinese garlic sold as `wild leek (Allium ampeloprasum)