Microeconomic - Government Policies

1. Price controls

 

(1) Price Ceiling vs Price Floor

• Price Ceiling (가격상한) : maximum on the price
  • The price ceiling is binding if set below the equilibrium price -> leading shortage.
• Price Floor (가격하한) : minimum on the price

 

(2) Price Ceiling

 

• (a) A Price Celling That is not binding -> above the equilibrium price
• (b) A Price Celling That is binding -> below the equilibrium price -> leading shortage
  • becase Demand quantitiy > Supply quantity
  • nonprice rationing -> Long lines, discrimination by sellers

 

 

Example - The Price Ceiling on Gasoline 

• the price celling is not binding and above the equilibrium price
• supply falls
• price celling becomes binding
• resulting in a shortage

 

• Case Study - Rent Control (임대료 통제)
  • Gole of the rent control policy : to help the poor by making housing more affordable
  • Short run : Supply and Demand both very inelastic ( 단기적으로, 임대주택의 수는 고정되어 있음. 즉 공급은 고정되어 있다. 집을 구하는 사람의 수는 변하지 않을 가능성이 높음. 즉, 단기적으로는 inelastic)
  • Long run : Supply and Demand more elastic ( 장기적으로, 수요자와 공급자들이 민감하게 반응함. 공급자들은 (임대주택 주인들) 새로 짓지 않음. 수요자들은 임대주택을 구함. 즉, 장기적으로는 elastic

 

 

• Reasons of goverment intervene (이거 쫌 이해안감,, )
  • No Perfect market competition : few landlords / many consumer
  • heterogenous servie ,, ?? ,,
  • Search and moving cost are high
  • Imperfect competition : suboptimal allocation of resources, So goverment intervation could be efficeienct enhancing
  • Equity issue
  • Rich household more margin to adapt to changes in rents than poor household.

 

(3) Price Floor

 

 

• (a) A Price Floor That is not binding -> below the equilibrium price
• (b) A Price Floor That is binding -> above the equilibrium price -> leading surplus
  • becase Supply > Demand
  • nonprice rationing -> The minimum wages ( important example of price floor ), agricultural price support

 

• Case Study - Minimum Wage
  • Minimum Wage : Supply > Demand (즉, 공급량이 많다는 것은 실업이 발생하는 것을 의미)
  • Minimum wages around the world

 

 

(4) Taxes

• Goal : to raise revenue for public projects
  • Taxese discourage market activity
  • Quantity sold is smaller
  • Buyers and sellers share the tax burden
  • Taxes result in a change in market equilibrium.
  • Buyers pay more and seller receive less, regardless of whom the tax is levied on

 

• Case 1 : A Tax on buyers (소비자한테 부과하는 경우, 수요가 감소할 것임)
  • A tax on buyers shifts the demand curve downward by the size of the tax ($0.5)
  • Result : decrease quantity of ice - cream cones
  • Price without tax : 3.00
  • Price buyers pay : 3.30 
  • Price sellers recieve : 2.80
  • Tax of buyers ( $0.3 ) > Tax of sellers ( $0.2 )

• Case 2 : A Tax on Seller ( 공급자에게 부과하는 경우, 비용이 증가할 것임)
  • A tax on sellers shifts the supply curve upward by the amount of the tax
  • Result : decrease quantity of ice - cream cones
  • Price without tax : 3.00
  • Price buyers pay : 3.30 
  • Price sellers recieve : 2.80
  • Tax of buyers ( $0.3 ) > Tax of sellers ( $0.2 )

 

 

 

• Case 3 : A payroll Tax

 

 

 

(5) Elasticity and Tax Incidence

• How do the effects of taxes on sellers compare to those levied on buyers?

 

• (a) Elastic Supply, Inelastic Demand 
  • Scope : Supply < Demand
  • Consumer tax > Producers Tax
• (b) Supply inelastic, elastic Demand
  • Scope : Supply > Demand
  • Conumer tax < Producers Tax

 

(6) The Costs of Taxation

• How do taxes affect the economic well-being of market participants? - Key Concept: The Deadweight loss of taxation

The Effects of a Tax

 

• (the goverment's) Tax Revenue : the size of the tax (T) * the quantity of good sold (Q)

 

• A deadweight loss is the fall in total surplus that results from a market distortion, such as a tax.
• Deadweight : C+E

 

 

(7) How a Tax Affects Market Participants

• The change in conusmer surplus
• The change in producer surplus
• The change in tax revenue
• The losses to buyers and sellers exceed the revenue raised by the goverment.
• The fall in total surplus is called the deadweight loss

 

 

(8) Determinations of the deadweight loss

 

• The greater the elasticities of demand and supply :
  • the larger will be the decline in equilibrium quantity and
  • the greater the deadweight loss of a tax

 

 

• (a) Inelastic Supply : the deadweight loss of a tax is small
• (b) elastic Supply : the deadweight loss of a tax is large
• (c) Inelastic Supply : the deadwieght loss of a tax is small
• (d) elastic Supply : the deadweight loss of a tax is large

 

(9) Deadweight loss and tax revenue as taxes vary

• After a specific interval, the tax revenue decreases

 

•  As the size of a tax increases, its deadweight loss quickly gets larger.
• But,tax revenue first rises with the size of a tax, but then, as the tax gets larger, the market shrinks so much that tax revenue starts to fall
• So, Revnnue curve is same to Laffer curve (relationship between tax rates and tax revenue)