Oct 15 Public Policies and the Costs of Taxation

Oct 15 Public Policies and the Costs of Taxation - Public...

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Public Policies and the Costs of Taxation Summary of last lecture An efficient allocation of resources is one that maximizes the sum of consumer and producer surplus. The equilibrium of demand and supply maximizes the sum of consumer and producer surplus. It is as if the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently. Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes. Context and purpose In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. While equilibrium condition may be efficient, it may be true that not everyone is satisfied One of the roles of economists is to use their theories to assist in the development of policies Price Control Policies that control prices Are usually enacted when policy makers believe the market price is unfair to buyers or sellers Efficiency vs equity Result in government-created price ceilings and floors o Price Ceiling: a legal maximum on the price at which a good can be sold. o Price Floor: a legal minimum on the price at which a good can be sold Price Ceilings The rice ceiling is binding if set below the equilibrium price, leading to a shortage If above the equilibrium price, no effect Case Study: Oil Market A binding price ceiling, because Q D > Q S , creates: o Shortages (e.g., Gasoline shortage of the 1970’s)
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o Non-price rationing : long lines, discrimination by sellers. How do we decide who will be supplied? In 1973, OPEC raised the price of crude oil in world markets.
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Oct 15 Public Policies and the Costs of Taxation - Public...

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