ECN 001A Lecture Notes - Lecture 16: Tax Incidence, Opportunity Cost, Economic Equilibrium
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Lecture 16: 5/14/18
Chapter 6: Supply, Demand, and Government Policies
• Government Policies that Alter the Private Market Outcome
o Price Controls
▪ Price Ceiling: legal max on the price of a good/service
• Above the equilibrium price = not binding: has no effect on the market
outcome
• Binding constraint on a price causes shortage
▪ Price Floor: legal min on price of good/service
• Below equilibrium price = not binding: has no effect on the market
outcome
• Binding constraint on the wage causes a surplus (ex: unemployment)
o Taxes
▪ Gov can make buyers or seller pay a specific amount on each unit
• Shortages and Rationing
o In long run, supply and demand are more price-elastic
▪ Shortage is larger
o During shortage, sellers must ration goods among buyers
▪ Rationing mechanisms:
• 1) Long Lines
• 2) Discrimination according to sellers’ biases
o When prices aren’t controlled, rationing mechanism is efficient
• The Minimum Wage
o Minimum wage laws do not affect highly skilled workers
o Do affect teen workers
Lecture 17: 5/16/18
• Taxes
o Govt levies taxes on many goods and services to raise revenue to pay for national
defense, public schools, etc.
o Government can make buyers or sellers pay the tax
o Can be a % of the good’s price, or a specific amount for each unit sold
• Tax on Buyers
o Shifts the D curve down by the amount of the tax
• Incidence of a Tax
o How the burden of a tax is shared among market participants
• Tax on Sellers
o Shifts the S curve up by the amount of the tax
• Outcome Same in Both Cases
o Effects on P and Q, and the tax incidence are the same whether tax is imposed on
buyers or sellers
▪ Tax drives wedge between the price buyers pay and the price sellers receive
o Incidence of tax depends on the price elasticities of supply and demand
Lecture 18: 5/23/18
Chapter 7: Consumers, Producers, and the Efficiency of Markets
• Welfare Economics
o Studies how the allocation of resources affects economics well-being
o Allocation of Resources refers to:
▪ How much of each good is produced
▪ Which producers produce it
▪ Which consumers consume it
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