PAM200Lecture16 - PAM 200 Lecture 16 Agenda Policy Analysis...

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    PAM 200 Lecture 16 Agenda Policy Analysis Using Model Policies that Shift Supply Curve Policies that Create a Wedge between  MB and MC General Equilibrium
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    Policy Analysis Using Model Most policies either shift the supply  curve or create a wedge between MB  and MC  These policies  lower social welfare Example:  A policy that limits the  number of firms in a market Even though policy lowers social  welfare, we can show that producers  have an incentive to lobby for it
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    Policies that Shift Supply  Curves Example:  Legal limit on # of taxicab  companies (taxi cab medallion) Many cities have some kind of limit on  the number of taxi companies
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    Policies that Shift Supply  Curves (con’t) Without entry barrier, then the industry  would likely meet our key conditions: Free entry and exit There is an unlimited number of firms All firms have identical costs Input prices are constant Firms can easily enter and exit; no scarce  input
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    Entry Barrier in Taxi Cabs So competitive cab industry looks like a  market with flat supply curve Note the massive amount of consumer  surplus  But no producer surplus Now suppose an entry barrier is  imposed
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    Entry Barrier in Taxi Cabs  (con’t) Note that if no added firms can enter, then the  only way output can be expanded is if each  firm expands its output That means climbing up the MC curve for  each firm, which means an upward sloping  supply curve Here the supply curve begins to slope up  once you hit the minimum of the LRAC curve
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    Entry Barrier in Taxi Cabs  (con’t) Policy creates a deadweight loss of C,  producer surplus of B, and consumer surplus  of A  There is an economic profit of  π Also called an economic “rent”  But if there is a market for the medallion or if  they are leased, then the rent will go to the  owner of the medallion  the AC for the cab firm will rise
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