ECON1101 Lecture Notes - Lecture 4: Economic Equilibrium, Deadweight Loss, Price Ceiling
Wednesday, 26 April 2017
Microeconomics
Government Intervention
-Perfectly competitive markets converge to an equilibrium where total surplus is
maximised
-Any govt. intervention that prevents a market from reaching its P* is bad for total
surplus
•Avoid gov. intervention at all costs (sometimes not true - public goods)
-Price Ceiling: Represents a maximum allowable price imposed by the government
•When govt. believes price is unfairly high; protects low-income consumers
•Deadweight Loss: Loss in total economic surplus due to market being prevented
from reaching market equilibrium price & quantity where marginal benefit equals
marginal cost
•‘Winners’ of this policy are consumers with high reservation price (ie the rich)
•Solution - if govt. wanted to help low-income households, direct lump sum transfer ti
poor is more efficient
-Price Floor: Represents minimum allowable price imposed by government
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Document Summary
Perfectly competitive markets converge to an equilibrium where total surplus is maximised. Any govt. intervention that prevents a market from reaching its p* is bad for total surplus: avoid gov. intervention at all costs (sometimes not true - public goods) Price floor: represents minimum allowable price imposed by government. Taxation: unlike price ceiling & price oor, a tex generates tax revenues, tax revenues can be used to redistribute wealth within a society. Improves distribution of income & opportunities across different population groups: losers" of this policy are: Consumers (if d = inelastic or s = perfectly elastic) Producers (is s = inelastic or d = perfectly elastic: winner" is the government - receives tax revenue. Use tax revenue to subsidise/reduce taxes on other markets, provide public goods etc. Wednesday, 26 april 2017: solution - the losers" would be willing to pay the winner" the exact amount it gained from the intervention in exchange for cancelling the tax > pareto improving.
