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Lecture 7

ECON 20A Lecture 7: Lecture 7

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William Branch

Lecture 7 I. Taxes and Market Efficiency a. Main Idea i. Government levy taxes to raise revenue to provide public goods and services ii. There are often good economic reasons for the government to provide goods, e.g. courts iii. This lecture focuses on tradeoff consequences of taxes b. Deadweight loss the tradeoff consequence to society from the tax c. On the graph i. The height of the box is the tax; the width is the quantity sold ii. The tax times the quantity is the total amount of revenue collected by the government (surplus to the government) iii. Consumer surplus is the space between the price paid and the demand curve iv. Producer surplus is the space between the price earned and the supply curve v. The wedge triangle in the center (the parts that used to be included in consumer and producer surplus) is deadweight loss. d. Source of deadweight loss i. The market is not allocating resources efficiently since there is a region where buyers value the good more than the cost so this prevents buyers and sellers from receiving some gains from trade. ii. Why does it prevent them from trading? Buyers and sellers are responding to incentives induced by the tax: higher cost gives buyers incentive to consumer less and producers and incentive to produce less by raising their cost At any price P, the firm will maximize profits by producing the quantity at the level where P=MC. If P=MCmin. AVC but less than ATC then the firm will be able to cover its variable costs of production as well as part of its fixed costs. Therefore it will decide to operate in the short run to minimize losses and shut down and exit in the longer run. IfP=MC>ATC, then the firm is earning profits and will operate in the short and long run as well. At P=10, the firm will not produce any output since P=MC=10< AVC. Thus the firm will shut down, i.e. Q=0. Profit=0 (i.e. it is neither earning any positive profit nor incurring any loss I think breakeven would be the right answer in case there is no
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