ECON 101 Lecture Notes - Lecture 12: Rent-Seeking, Economic Surplus, Demand Curve
Rent seeking and the sugar quota:
● rent = pure profit —> what the import is getting (quota rent)
○ license to import allows person to generate profits - profit = to quota rent
Why impose trade taxes/quotas:
● by taxing imports, domestic producers face more accommodating market conditions
○ producer surplus increases
● tariffs and other policies designed to deter trade “protect” domestic producers
○ accomplished at the expense of domestic consumers
○ DWL reflects the fact that consumer surplus losses exceed producer surplus
gains
● benefits of these polices in terms of increased producer surplus are clear
○ protects workers
○ producer surplus is generate by tariffs/production subsidies
● welfare of domestic consumers are at risk
○ consumers prefer production subsidies much more
■ low world costs
■ tax payer pays for production subsidy
■ govt.
● Tariff focuses on action of imports
Supply and Demand Functions:
● We have used the supply and demand model to capture how market prices evolve
○ how prices evolve in response to market shocks
○ how resource allocation changes in the face of market shocks
○ welfare effects of shocks in the market
● How do we actually quantify these?
○ requires that we have more explicit information about the supply and demand
curves
Example: Increase in supply:
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●
●
○ only diff between two is slope in demand curve
● Minimum wage:
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Document Summary
Rent = pure profit > what the import is getting (quota rent) License to import allows person to generate profits - profit = to quota rent. By taxing imports, domestic producers face more accommodating market conditions. Tariffs and other policies designed to deter trade protect domestic producers. Accomplished at the expense of domestic consumers. Dwl reflects the fact that consumer surplus losses exceed producer surplus gains. Benefits of these polices in terms of increased producer surplus are clear. Producer surplus is generate by tariffs/production subsidies. Welfare of domestic consumers are at risk. We have used the supply and demand model to capture how market prices evolve. How prices evolve in response to market shocks. How resource allocation changes in the face of market shocks. Welfare effects of shocks in the market. Requires that we have more explicit information about the supply and demand curves. Only diff between two is slope in demand curve.
