Supply Restrictions, Tax, and Subsidy

Transcription

1 Agricultural rice Support. rinciples of Microeconomics, Fall Chia-Hui Chen October, Lecture Supply Restrictions, Tax, and Subsidy Outline. Chap : Agricultural rice Support. Chap : Supply Restrictions 3. Chap : Tax and Subsidy Agricultural rice Support In this case, government sets prices higher than the free market level, and buys excess supply (see Figure ). The buyer s price is shown on the y-axis in the following graphs. The original consumer surplus equals the area between the S A B D 3 E D 3 3 Figure : Agricultural rice Support. demand curve and the line of price ; after the price support, it equals the area between the demand curve and the line of price, thus ΔCS = (A + B). The original producer surplus equals the area between the supply curve and the line of price ; after the price support, it equals the area between the supply Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall. MIT

2 Supply Restrictions curve and the line of price, thus ΔS = A + B + D. Government buys quantity 3 at price ; the cost equals the area of the rectangular ΔG = (B + D + E). The deadweight loss to the society is DWL = (B + E). Supply Restrictions Government restricts quantity supplied to be less than (see Figure ). The S A B C 3 D Figure : Supply Restriction. original consumer surplus equals the area between the demand curve and the line of price ; after the supply restriction, it equals the area between the demand curve and the line of price, thus ΔCS = (A + B). The original producer surplus equals the area between the supply curve and the line of price ; after the supply restriction, it equals the area of the trapezoid, with the supply curve, the line of price, the line of quantity, and the price axis as its sides, thus ΔS = A C. Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall. MIT

3 . Zero uota 3 Thus, the deadweight loss is DWL = (B + C). Example government measures include import quota and tariff, which benefit domestic producers but hurt consumers.. Zero uota S D is the domestic supply, and D D is the domestic demand. If no import is allowed, the domestic price is. Without restriction on import, the domestic price would be the same as the world price W, which is lower than D (see Figure 3). Without import quota restriction, consumer surplus equals the area S D W A B C 3 D D S D 3 Figure 3: Zero uota. between the domestic demand curve and the line of price W ; if the quota is zero, it equals the area between the domestic demand curve and the line of price, thus ΔCS = (A + B + C). Without quota restriction, producer surplus equals the area between the domestic supply curve and the line of price W ; if the quota is zero, it equals the area between the domestic supply curve and the line of price, thus ΔS = A. The deadweight loss is DWL = B + C.. Non-Zero uota Given the same S D, D D, and W, now suppose the government sets non-zero quota k. The domestic price is where the difference between domestic demand Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall. MIT

4 .3 Import Tariff S D 3 W A B C D D D S S D D Figure : Non-Zero uota. ( D ) and domestic supply ( S ) is k (see Figure ). Likewise, the change of consumer surplus ΔCS = (A + B + C + D); and the change of domestic producer surplus The net domestic loss equals ΔS D = A. (ΔCS + ΔS) = B + C + D. The foreign producer surplus increases by excess profits, which equal the area of rectangular C ΔS F = C. The total deadweight loss is DWL = B + D. The domestic loss is Domestic Loss = B + C + D..3 Import Tariff Government imposes a tariff W on each unit imported (see Figure ). The change of consumer surplus and domestic producer surplus are Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall. MIT

5 3 Tax and Subsidy S D 3 W A B C D DD S S D D Figure : Import Tariff. ΔCS = (A + B + C + D) and ΔS D = A, respectively. Foreign producers gain nothing, that is to say ΔS F =, because C becomes the revenue of government ΔG = C. The deadweight loss is DWL = B + D, which equals to the domestic loss. 3 Tax and Subsidy Assume that government imposes a $ tax on each cigarette unit. Given the market price, if the tax is paid by producers, then buyers pay and producers get ; consumers, then buyers pay + and producers get. Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall. MIT

6 3 Tax and Subsidy Therefore, the price paid by buyers and the price received by producers always have a difference of (see Figure ). Let B be the buyer s price and S be the seller s price. D S =. In figure, we put buyer s price on the y axis. Therefore, with the tax, the supply curve moves from S to S. The equilibrium buyer s price is D, and the equilibrium seller s price is S. Thus, the consumer surplus and producer. buyer s price 3. 3 D. S. A C B D S D S. 3 Figure : Tax. surplus both decrease: Government revenue So, the deadweight loss is ΔCS = (A + B), Δ S = (C + D). ΔG = A + C. DW L = B + D. Cite as: Chia-Hui Chen, course materials for. rinciples of Microeconomics, Fall. MIT