nlecture14 - government

nlecture14 - government - Topic 6: Competitive Markets (3)...

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opic 6: Competitive Markets (3) Topic 6: Competitive Markets (3) Government intervention USC Marshall
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Government intervention • If markets are competitive, they generate the most efficient outcome. So when and why do/should governments intervene in the functioning of markets? Positive: • Externalities, public goods • Imperfect competition Normative: • Equity “negative” USC Marshall •capture
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Government intervention First: – Types of intervention • General –Taxes and subsidies –Price floors, price supports, production quotas and voluntary production reduction programs • International trade –Tariffs and import quotas Next: USC Marshall – When can intervention be positively warranted?
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Taxes and subsidies Taxes and subsidies: – Drive a wedge between what the consumer pays and what the producer receives – Specific tax: $ amount per unit independent of price – Ad valorem tax: % of price paid – A subsidy: A negative tax – Even if inefficient, the government may need to ollect taxes to raise revenue to fund different collect taxes to raise revenue to fund different programs ational security, education, healthcare, social USC Marshall National security, education, healthcare, social security…
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Taxes and subsidies Who pays the tax? tatutory incidence: Statutory incidence: – Who pays the tax: consumer or producer conomic incidence: Economic incidence: – How much of the tax burden is actually borne by the consumers and the producers • Change in the price faced by consumers • Change in the price received by producers • Statutory incidence is not the same as the USC Marshall economic incidence
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Taxes and subsidies • Consider a tax T levied on a product: – Then, producers receive P S , consumers pay P B . In equilibrium, P S =P B -T • Three ways to view a specific tax T: – Shifting the demand curve down – Shifting the supply curve up – Using the original demand and supply while solving the quantity for which P S =P B -T USC Marshall
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Taxes and subsidies P D S P S =P B USC Marshall Q Q*
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Taxes and subsidies P D Shifting the demand down by T. .. T P' B S P' S P S =P B USC Marshall Q Q' Q*
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Taxes and subsidies P D ...or shifting the supply up by T. .. T P' B S P' S P S =P B USC Marshall Q Q' Q*
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Taxes and subsidies P D ...or finding the Q' for which the gap is satisfied P' B S T P' S P S =P B USC Marshall Q Q' Q*
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Taxes and subsidies • Note that with respect to the economic outcome, who actually pays the tax is irrelevant • The economic incidence (who really pays the tax) is determined through the adjustment in the market price and reflects the elasticities of demand and supply • The less elastic demand is, the more of the tax is passed on to the consumers USC Marshall
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Taxes and subsidies • Some extremes P P (i) perfectly elastic supply i) perfectly inelastic supply Q Q P P ()p y ppy (ii) perfectly inelastic supply USC Marshall QQ (iii) perfectly elastic demand (iv) perfectly inelastic demand
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Taxes and subsidies • Some extremes P P T P B S
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This note was uploaded on 03/09/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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nlecture14 - government - Topic 6: Competitive Markets (3)...

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