equilibrium2-ho

equilibrium2-ho - Equilibrium Chapter 16 Competitive...

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Equilibrium Chapter 16
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Competitive Equilibrium: Motivating Questions Firms are ‘price-takers’ in competitive markets, but how is the market price (and quantity) determined? competitive equilibrium What happens to equilibrium price and quantity when either supply or demand changes? comparative statics What are the effects of taxes and subsidies on prices and quantities? What are the welfare effects of taxes and subsidies? deadweight loss, tax incidence
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Taxes Quantity (or excise) tax Effect on p , q Subsidy Incidence Welfare effects Price tax: effect on p , q
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Quantity Taxes Levied on each unit sold. E.g. gasoline tax: seller sets price at $2.05/gallon and gasoline tax is $0.35/gallon. Consumer must pay p d = 2 . 05 + 0 . 35 = 2 . 40 dollars/gallon Seller gets p s = 2 . 05 Like any tax, this creates a wedge between what consumer pays and what producer receives The $0.35 tax, collected by the govt., is the difference between the consumer price , p d , and the producer price , p s : p d - p s = 0 . 35
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Equilibrium with a Quantity Tax Suppose gasoline tax is t dollars/gallon. t as a wedge: p d - p s = t = p d = p s + t How does this affect equilibrium? New condition: D ( p d ) = S ( p s ) Rewrite as D ( p s + t ) = S ( p s ) or D ( p d ) = S ( p d - t ) Can think of this as either shifting D or S
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Equilibrium with a Quantity Tax One view: demand shifts downward Equilibrium with Quantity Tax: Shifting Demand Gas p s D(p s + t) p s S(p s ) q t D(p s ) p * q * t p d
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Equilibrium with a Quantity Tax
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equilibrium2-ho - Equilibrium Chapter 16 Competitive...

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