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Lecture 4

Economics 2151B - Lecture 4.docx

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Western University
Economics 2150A/B
Kristin Denniston

Economics 2151B Wednesday January 15 Lecture 4 Homework 1 is posted on OWL • You have 2 submission opportunities • Due in one week on Jan. 22 by midnight Seller Subsidy (opposite of a tax) • Supply curve shifts down by the amount of a subsidy o The government pays the seller a fixed amount per unit sold o The seller is willing to sell each unit at a lower price by the amount of the subsidy • The demand curve shows what the consumer is willing to pay. • DWL from overproduction • CS increases, PS increases, but gov. expenditure is higher than DWL o The DWL isn’t enough to compensate producers and consumers • The policy is economically efficient if it maximizes total surplus o TS = CS + PS + Gov. revenue • Method to see if a policy is economically efficient: 1. Find the P and Q equilibrium before the policy, and the TS before the policy is implemented 2. After the policy is implemented, you will find out where the new P,Q equilibrium is after the policy, and the TS after the policy is implemented 3. DWL = TS Befor- TSAfter • Example: Before • TS (P = 8, Q = 6)B) + (E+F) + 0 • TS Afte(Qs = 7, Ps)+B+E+G+K) + (B+E+F+C) – (B+C+J+G+K+E)  Simplify (cancel out): A + B + E + F – J Before After • DWL = TS – TS = -(-J) = J Price Ceilings and Price Floors Two things you have to ask yourself: 1) Is it binding? 2) The TS can differ depending upon who is consuming and who is providing the good. Price Ceilings • A price ceiling prevents the price from going higher • Examples of price ceilings: rent control, OHIP (they pay below a natural market price for a doctor’s visit) • A price ceiling that is not binding does not affect the market. • A price ceiling is only binding if it is set below the natural market price. • Shortage – suppliers are only able to supply a small amount even though people are demanding more  eg. if you have a price ceiling on apartments, it
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