Date post: | 30-Dec-2015 |
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When We Don’t “Like” the Market Outcome
The Effect of Price Floors, Price CeilingsTariffs, Quotas, Subsidies and Externalities
on the Market Outcome
Solution to shortage problem:offer incentives to suppliers to increase supply
P*
Quantity0
Price
Demand
Supply
PriceCeiling
Q**Q*
Subsidy
Solution to shortage problem: Set price = equ. price and offer subsidies to buyers
P*
Quantity0
Price
Demand
Supply
PriceCeiling
Shortage
QdQs Q*
Example of price ceiling: Rent Control in the Short Run
Quantity ofApartments
0
Rental Price ofApartment
Demand
Supply
Controlled rent
Shortage
Supply and demand for
apartments are relatively inelastic
QdQs
Example of price ceiling: Rent Control in the Longer Run
Quantity ofApartments
0
Rental Price ofApartment
公寓租金价格
Demand
Supply
Controlled rent
Shortage
短缺
Supply and demand for apartments are more
elastic...
QdQs
How to solve the surplus problem?
P*
Quantity
0
Price
Demand
Supply
Price floor
QsQd
Surplus
Q*
1. Destroy it
2. Give it away or sell it in another market
3. Pay producers Pf * [ Qs(Pf) – Qd(Pf)] not to produce beyond Qd(Pf)
Pf
MinimumWage
Example of price floor: The Minimum Wage
Quantity ofLabor
0
Wage
Labor Demand
Labor supply
QuantitySupplied
QuantityDemanded
Labor surplus (unemployment)
Effect of Import Tariffs and Quotas: Domestic Price Increases
Quantity0
DomesticPrice
D
S
S’
Q1
P2
P1
Q2
QMARKET
Negative Externalities
Quantity0
Price
Market Demand (market value)
Market Supply (market cost)
Social Supply(social cost )
Qsociety
Psociety
Pmarket