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Econ 1B03 - Chapter 6&8 Part 2.docx

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McMaster University
Hannah Holmes

Richard Damra Wednesday, February 13, 2013 Econ 1B03 – Chapter 6&8 – Supply, Demand & Government Policies Chapter 6 Quotas  Quota: is a quantity control. An upper limit on the quantity of the good that can be sold.  Government will usually issue a quota license that give producers to produce a specified aount of the good. Example: Number of taxis in a city is controlled. Amount of fish you can catch.  Market for Milk: o  In an unregulated market, equilibrium P = $1 and Q = 13 million litres per week  The Canadian Dairy Association decides to limit output to increase prices received by producers and avoid surplus. The neat thing about Quota is that you can’t over produce this no surplus to worry about.  It makes sure the government backs it up by imposing tariffs on imports of milk from the US. This will make milk expensive enough so that consumers won’t buy US milk.  The quota is set at 9 million litres per week.  At Q = 9 million, consumers are willing to pay $1.80 per litre (this is the demand price).  But, at that Q, producers would normally, be happy to receive $0.60 per litre   $1.80 = Price consumers pay Richard Damra Wednesday, February 13, 2013  $0.60 = Price firms pay  Firms are happy because they receive more money than they would be happy with at the production of 9 million litres of milk. They receive an extra $1.20 which is considered the quota rent (value of quota).  Golden rule: Whenever the quantity traded is not equal to equilibrium quantity we are going to lose total surplus  The difference between these 2 prices is the quota rent: quota owners receive an additional $1.20 per litre per week.  This is also the value of the quota. o Someone who wanted to produce milk would be willing to pay up to $1.20 per litre per week to acquire the rights to produce milk, sell it at $1.80 and net $.60 per litre per week. Taxes  Governments levy taxes to raise revenue for public projects.  Tax incidence: the distribution of a tax burden.  Do buyers or sellers bear the burden when the government imposes a tax? A tax on Consumers  Example: Market for Beer  P is the price per bottle  Q is the number of bottles sold per week at a very small bar in a farming community  In equilibrium, P = $3.00 and Q = 100  Now suppose the government imposes a tax of $0.50 per bottle on consumers of beer.  Net effect: consumers will demand less beer (law of demand)  The government doesn’t care what the equilibrium price is, and the $0.50 tax will apply no matter what the price of beer happens to be.  Tax is going to shift the demand cur
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