9 Government Interventions - 9 GOVERNMENT INTERVENTIONS IN...

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GOVERNMENT INTERVENTIONS IN COMPETITIVE MARKETS 9 Econ 100A Mortimer 1 10/14/2009
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THE EFFICIENCY OF A COMPETITIVE MARKET The output produced in a perfectly competitive market is the one that maximizes the sum of the surpluses. economic efficiency Maximization of aggregate consumer and producer surplus. S D P Q CS Q* P* 20 10 PS 10/14/2009 2 Econ 100A Mortimer
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THE EFFICIENCY OF A COMPETITIVE MARKET S D P Q CS Q*=6 P*=8 20 10 PS welfare effects Gains and losses to consumers and producers. 3 deadweight loss Potential net economic benefit (surplus) that no one captures. Deadweight loss 10/14/2009 3 Econ 100A Mortimer
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THE EFFICIENCY OF A COMPETITIVE MARKET market failure Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers. e.g., externalities We will focus on 2. Why should we intervene in a competitive market? 1. market failure 2. objectives other than maximizing surplus 10/14/2009 4 Econ 100A Mortimer
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THE IMPACT OF A TAX OR SUBSIDY P d = the price (including the tax) paid by consumers. P s = the price that sellers receive, less the tax, t. e.g., P d = P s + t Specific Taxes (Excise Taxes) With no Tax With Tax Impact of Tax Consumer Surplus Producer Surplus Gov’t Receipts Total Welfare Deadweight Loss S+t S D P Q A B C E G F H P d P s Q*=6 Q’ P*=8 20 10 10/14/2009 5 Econ 100A Mortimer
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THE IMPACT OF A TAX OR SUBSIDY EXERCISE: Impact of an Excise Tax Q : Assume that the demand and supply curves are given by: Q d =10-0.5P d Q s = -2+P s , when P s ≥2 and 0 when P s <2 where P d represents the price consumers pay, P s the price producers receive, and Q s and Q d are measured in millions of units. Find the effects of an excise tax of $6 per unit? (Find Q, P d, P s, the government tax receipts, and the deadweight loss) .
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9 Government Interventions - 9 GOVERNMENT INTERVENTIONS IN...

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