Supply, Demand, and Government Policies

Transcription

1 N. GREGORY MANKIW RINCILE OF ECONOMIC Eight Edition CHATER 6 upply, emand, and Government olicies Modified by Joseph Tao-yi Wang remium oweroint lides by: V. Andreea CHIRITECU Eastern Illinois University 1 Look for the answers to these questions: What are price ceilings and price floors? What are some examples of each? How do price ceilings and price floors affect market outcomes? How do taxes affect market outcomes? How do the effects depend on whether the tax is imposed on buyers or sellers? What is the incidence of a tax? What determines the incidence? 2 Government olicies That Alter the rivate Market Outcome rice controls rice ceiling: legal maximum on the price at which a good can be sold Rent-control laws rice floor: legal minimum on the price at which a good can be sold Minimum wage laws es: government can make buyers or sellers pay a specific amount on each unit AK THE EXERT Rent Control Local ordinances that limit rent increases for some rental housing units, such as in New York and an Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them. 3 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 4 EXAMLE 1: The Market for Apartments How rice Ceilings Affect Market Outcomes Rental price of apartments $8, 3 Equilibrium without price controls uantity of apartments A price ceiling above the equilibrium price is not binding has no effect on the market outcome. $1, $8, 3 rice ceiling 5 6 1

2 How rice Ceilings Affect Market Outcomes How rice Ceilings Affect Market Outcomes The equilibrium price ($8,) is above the ceiling and therefore illegal. The price ceiling is binding, causes a shortage. $8, $5, shortage 25 4 rice ceiling In the long run, supply and demand of rental apartments are more priceelastic. o, the shortage is larger. $8, $5, 15 shortage 45 rice ceiling 7 8 hortages and Rationing Because of shortage ellers must ration the goods among buyers ome rationing mechanisms: Long lines iscrimination according to sellers biases Are often unfair and inefficient The goods do not necessarily go to the buyers who value them most highly EXAMLE 2: The Market for Governmental Employees Wage paid to gov t employees $22, W 5 uantity of gov t employees Equilibrium without price controls L 9 1 How rice Floors Affect Market Outcomes How rice Floors Affect Market Outcomes A price floor below the equilibrium price is not binding has no effect on the market outcome. $22, $16, W 5 rice floor L 11 The equilibrium wage ($22k) is below the floor and therefore illegal. The price floor is binding, causes a surplus (i.e., unemployment). Minimum wage laws do not affect highly skilled workers. They do affect unskilled workers. What is the form of unemployment for governmental employees in Taiwan? W $3, $22, labor surplus 4 55 rice floor Everyone takes the exams! L 12 2

3 AK THE EXERT The Minimum Wage If the federal minimum wage is raised gradually to $15-per-hour by 22, the employment rate for low-wage U.. workers will be substantially lower than it would be under the status quo. as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 13 hotel 14 rooms is in equilibrium as in the graph. 13 etermine the 11 effects of: 1 A. $9 price ceiling 9 B. $9 price floor C. $ price floor rice controls The price falls to $9. (binding price ceiling below the equilibrium) Buyers demand rooms, sellers supply 9, leaving a shortage A. $9 price ceiling rice ceiling shortage = 3 Equilibrium price is above the $9 price floor, so the price floor is not binding. = $1, = 1 rooms B. $9 price floor rice floor The price rises to $. (binding price floor above the equilibrium) Buyers demand 6 rooms, sellers supply, causing a surplus C. $ price floor surplus = 6 rice floor Evaluating rice Controls Markets are usually a good way to organize economic activity Economists usually oppose price ceilings and price floors rices are not the outcome of some haphazard process rices have the crucial job of balancing supply and demand Coordinating economic activity

4 Evaluating rice Controls es Governments can sometimes improve market outcomes Want to use price controls Because of unfair market outcome Aimed at helping the poor Often hurt those they are trying to help Other ways of helping those in need Rent subsidies Wage subsidies (earned income tax credit) Government uses taxes To raise revenue for public projects Roads, schools, and national defense incidence Manner in which the burden of a tax is shared among participants in a market The government can make the seller or the buyer to pay the tax 19 2 EXAMLE 3: The Market for izza 5 Equilibrium without tax A on Buyers Effects of a $45 per unit tax on buyers $ Hence, a tax on buyers shifts the curve down by the amount of the tax. The price buyers pay is now $45 higher than the market price. would have to fall by $45 to make buyers willing to buy same as before. E.g., if falls from to $255, buyers are still willing to purchase 5 pizzas A on Buyers B = Effects of a $45 per unit tax on buyers $33 = $ New equilibrium: = 45 ellers receive = $285 Buyers pay B = $33 ifference between them = $45 = tax The Incidence of a : how the burden of a tax is shared among market participants In our example, buyers pay $3 more, sellers get $15 less B = $33 = $

5 A on ellers A on ellers $345 Effects of a $45 per unit tax on sellers The tax effectively raises sellers costs by $45 per pizza. ellers will supply 5 pizzas only if rises to $345, to compensate for this cost increase. Hence, a tax on sellers shifts the curve up by the amount of the tax. B = = Effects of a $45 per unit tax on sellers $33 $ New equilibrium: = 45 Buyers pay B = $33 ellers receive = $285 ifference between them = $45 = tax The Outcome Is the ame in Both Cases! The effects on and, and the tax incidence are the same whether the tax is imposed on buyers or sellers! $33 1 B = A tax drives a wedge between the price buyers pay and the price sellers receive. = $ Active Learning 2 hotel 14 rooms is in equilibrium 13 as in the graph. uppose the 11 government 1 imposes a tax on 9 buyers of $3 per 8 room 7 Find the new 6, B,, and 5 incidence of tax. Effects of a tax Active Learning 2 = 8 B = $11 = $8 Incidence buyers: $1 sellers: $ B = = Answers Elasticity and Incidence CAE 1: upply is more elastic than demand Buyers share rice if no tax ellers share B It s easier for sellers than buyers to leave the market. o buyers bear most of the burden of the tax. 3 5

6 Elasticity and Incidence CAE 2: emand is more elastic than supply Buyers share rice if no tax ellers share B It s easier for buyers than sellers to leave the market. ellers bear most of the burden of the tax. Who pays the cigarette tax? 217, Taiwan s Legislative Yuan increased the cigarette tax by NT$2. Goal: to raise revenue from those evil and wealthy cigarette companies Addictive items emand is quite inelastic upply is relatively elastic 31 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 32 CAE TUY: Who ays the Cigarette? Buyers share ellers share B cigarettes emand is price-inelastic. In the short run, supply is elastic. Hence, addicted smokers pay most of the tax. 33 Active Learning 3 The 211 payroll tax cut rior to 211, the ocial ecurity payroll tax was 6.2% taken from workers pay and 6.2% paid by employers (total 12.4%). The Relief Act (21) reduced the worker s portion from 6.2% to 4.2% in 211, but left the employer s portion at 6.2%. hould this change have increased the typical worker s take-home pay by exactly 2%, more than 2%, or less than 2%? o any elasticities affect your answer? Explain. FOLLOW-U UETION: Who gets the bigger share of this tax cut, workers or employers? How do elasticities determine the answer? 34 Active Learning 3 Answers As long as labor supply and labor demand both have price elasticity >, the tax cut will be shared by workers and employers, i.e., workers takehome pay will rise less than 2%. The answer does NOT depend on whether labor demand is more or less elastic than labor supply. FOLLOW-U UETION : If labor demand is more elastic than labor supply, workers get more of the tax cut than employers. If labor demand is less elastic than labor supply, employers get the larger share of the tax cut. ummary A price ceiling is a legal maximum on the price of a good. An example is rent control. If the price ceiling is below the equilibrium price, it is binding and causes a shortage. A price floor is a legal minimum on the price of a good. An example is the minimum wage. If the price floor is above the equilibrium price, it is binding and causes a surplus. The labor surplus caused by the minimum wage is unemployment

7 ummary A tax on a good places a wedge between the price buyers pay and the price sellers receive, and causes the equilibrium quantity to fall, whether the tax is imposed on buyers or sellers. The incidence of a tax is the division of the burden of the tax between buyers and sellers, and does not depend on whether the tax is imposed on buyers or sellers. The incidence of the tax depends on the price elasticities of supply and demand. rice Control Experiment (217) 1: No rice Control rice 2: Non- Binding rice Floor of $ upply, emand and Equilibrium : Binding rice Floor of $1 emand upply 2 4: Binding rice Ceiling of $5 uantity /1/7 rice Control and ation Joseph Tao-yi Wang Round 1: No rice Control Round 2: Non-Binding rice Floor Round 3: Binding rice Floor of $1 Round 4: Binding rice Ceiling of $5 217/1/7 rice Control and ation Joseph Tao-yi Wang 217/1/7 rice Control and ation Joseph Tao-yi Wang Chapter 6: rice Control and ation Markets are good? rice control is bad! Homework: Mankiw, Ch. 6, roblem 3, 5, 7, 8, 9, 1 Challenge uestions: 29 - (Multiple Choice 11) 21 - (True/False 6-8) (True/False 3-4) (True/False 6-7) Essay C Chapter 6: rice Control and ation Additional uestions: True or False. A price ceiling on wheat would cause the price of bread to fall. True or False. AU computers contain hard drivers made by other manufacturers. If AU made its own hard drives, AU computers would be cheaper. 217/1/7 rice Control and ation Joseph Tao-yi Wang 217/1/7 rice Control and ation Joseph Tao-yi Wang 7