Economic Efficiency Government Price Setting & Taxes.pdf - Economic Efficiency Government Price Setting and Taxes Errol D\u2019Souza Email

Economic Efficiency Government Price Setting &...

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1 Economic Efficiency Government Price Setting and Taxes Email: [email protected] Errol D’Souza
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2 The effects of government intervention in markets, such as price ceilings and price floors, is analyzed using the concepts of consumer surplus, producer surplus, and economic surplus. Consumer Surplus Demand curves show the willingness of consumers to pay a product at different prices. In the next figure an individual’s demand curve for chai is shown If the price is Re 3 per cup, Ishan will buy 4 cups of chai per week. If the price is Rs 2 per cup he will buy 5 cups per week. The fact that Ishan is willing to pay Rs 3 for the 4 th cup means that the marginal benefit to him from the fourth cup is Rs 3. Similarly since he is willing to pay Rs 2 for the 5 th cup means the marginal benefit to him from that cup is Rs 2. Errol D’Souza
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3 Price per cup Quantity (cups per week) 3 2 7 4 5 The marginal benefit is the additional benefit to a consumer from consuming one more unit of a good or service. Another way to think of the demand curve is as a representation of Ishan’s marginal benefit curve for chai. Errol D’Souza
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