Monday January 20
• Due this Wednesday Jan. 22 at midnight
• Posted under ‘Tests and Quizzes’ on OWL
Example of an algebra problem: Problem 10.5
Q = 100 - P
Q = P /3
Government gives $4 per unit subsidy to oil producers
The supply curve shifts down because we are willing to accept a lower price in
the market for each unit (because of the subsidy from the government)
If neither curve is perfectly inelastic, you will see a smaller change in the price
than the actual per unit tax. Both consumers and producers benefit from the per
Q = Q
P/3 = 100 – P
P* = 75
Q* = 25
P* 2 P = 74, Q* = 26
Producers receive P = Ps+ $4d
1/3P = 100 - P d
1/3(P d 4) = 100 - P
P = 74 (the new price we observe in the market)
P = P + 4 = 74 + 4 = 78
Q* 2 Qd = 100 – 74 = 26 (consumers will demand 26 units when the market
price is 74)
Answer: The price will drop by less than $4 because neither supply nor demand
is vertical or perfectly inelastic. The benefit of the subsidy will be shared by both
sides of the market. Price Ceilings and Price Floors
The two conditions we have to remember:
1. Is the price binding?
2. The DWL from the policy will vary depending on who the producers are supplying
the good, and who the consumers are, benefitting from the good.
We have a min DWL when either:
• The people with maximum willingness to pay get the good (this is a price
ceiling that’s binding), or
• The producers who produce at minimum marginal cost actually produce the
good (this is the price floor)
If the price ceiling is binding, it is below the natural equilibrium price, and the
observed market quantity and price will determined by what people are willing to
pay (the demand curve at that price).
Example: rent control, OHIP
If the price ceiling is not binding, the price ceiling is above the natural
equilibrium price (the price ceiling is constraining the price to be low). You would
be consuming at the natural equilibrium, P* and Q*.
A binding price floor has the price set above P* (the opposite of the price
ceiling). The price is not allowed to fall to its natural equilibrium. Quantity
demanded is below quantity supplied, which means you end up at a surplus.
Example: minimum wage
Results from a binding price floor:
• Excess supply
• Consumer surplus decreases – buy less than normally would in a free
• Producer surplus may increase or decrease
• DWL because not all of the lost consumer surplus goes to producer
o The DWL depends on who is supplying the good
A non-binding price floor means the price is below P*, and the market
equilibrium is at the natural equilibrium, P* and Q*. Quantity supplied is less than
quantity demanded, which ends up with a shortage.
The price floor prevents the price from falling below a certain amount.
The key is to identify the new equilibrium under the policy, which is set by the demand
curve. Example: Binding Price Floor - Minimum wage in the market for unskilled labour.
Min. wage in Ontario is approximately $10.25/hour.
If you natural market wage is above this minimum wage, the price floor is not
Unskilled workers are workers who lack experience or education (often teenagers or
high school dropouts). These people experience a binding minimum wage. This
should decrease the quantity of labour in the market, and there would be a surplus in
workers who want to work at that wage.
When you impose a minimum wage, if the employer can pass the cost on to the public,
you wouldn’t see that much of a reduction in employment. (Example: when Tim Hortons
raised their minimum wage, the cost of coffee went up)
Is minimum wage a good policy for helping those at the lower end of the income
• 40% of the people who benefit from minimum wage are teenagers from middle-
• Con: The main complaint against the minimum wage is that it’s poorly targeted
and doesn’t really help the poor.
• Pro: The minimum wage can be set to provide a living wage for people who are
actually working. (Example: in Florida where there minimum wage is so low,
there are people who are working at Wal-Mart or McDonalds full time and are still
Production Quota: A restriction on the amount that producers can sell to the market
• The government usually sets the quota on the amount you are legally allowed to
sell in t