ch09 - CHAPTER 9 OUTLINE 9.1 Evaluating the Gains and...

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1 of 28 CHAPTER 9 OUTLINE 9.1 Evaluating the Gains and Losses from Government Policies—Consumer and Producer Surplus 9.2 The Efficiency of a Competitive Market 9.3 Minimum Prices 9.4 Price Supports and Production Quotas 9.5 Import Quotas and Tariffs 9.6 The Impact of a Tax or Subsidy
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2 of 28 EVALUATING THE GAINS AND LOSSES FROM GOVERNMENT POLICIES— CONSUMER AND PRODUCER SURPLUS 9.1 Review of Consumer and Producer Surplus Consumer A would pay $10 for a good whose market price is $5 and therefore enjoys a benefit of $5. Consumer B enjoys a benefit of $2, and Consumer C , who values the good at exactly the market price, enjoys no benefit. Consumer surplus, which measures the total benefit to all consumers, is the yellow- shaded area between the demand curve and the market price. Consumer and Producer Surplus Figure 9.1
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3 of 28 EVALUATING THE GAINS AND LOSSES FROM GOVERNMENT POLICIES— CONSUMER AND PRODUCER SURPLUS 9.1 Review of Consumer and Producer Surplus Producer surplus measures the total profits of producers, plus rents to factor inputs. It is the green-shaded area between the supply curve and the market price. Together, consumer and producer surplus measure the welfare benefit of a competitive market. Consumer and Producer Surplus (continued) Figure 9.1
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4 of 28 EVALUATING THE GAINS AND LOSSES FROM GOVERNMENT POLICIES— CONSUMER AND PRODUCER SURPLUS 9.1 Application of Consumer and Producer Surplus welfare effects Gains and losses to consumers and producers. The price of a good has been regulated to be no higher than P max , which is below the market-clearing price P 0 . The gain to consumers is the difference between rectangle A and triangle B . The loss to producers is the sum of rectangle A and triangle C . Triangles B and C together measure the deadweight loss from price controls. Change in Consumer and Producer Surplus from Price Controls Figure 9.2 deadweight loss Net loss of total (consumer plus producer) surplus.
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5 of 28 EVALUATING THE GAINS AND LOSSES FROM GOVERNMENT POLICIES— CONSUMER AND PRODUCER SURPLUS 9.1 Application of Consumer and Producer Surplus If demand is sufficiently inelastic, triangle B can be larger than rectangle A . In this case, consumers suffer a net loss from price controls. Effect of Price Controls When Demand Is Inelastic Figure 9.3
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6 of 28 EVALUATING THE GAINS AND LOSSES FROM GOVERNMENT POLICIES —CONSUMER AND PRODUCER SURPLUS 9.1 Supply : Q S = 15.90 + 0.72 P G + 0.05 P O Demand : Q D = 0.02 − 0.18 P G + 0.69 P O The market-clearing price of natural gas is $6.40 per mcf, and the (hypothetical) maximum allowable price is $3.00. A shortage of 29.1 − 20.6 = 8.5 Tcf results. The gain to consumers is rectangle A minus triangle B , and the loss to producers is rectangle A plus triangle C . The deadweight loss is the sum of triangles B plus C .
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ch09 - CHAPTER 9 OUTLINE 9.1 Evaluating the Gains and...

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