Lecture 14 _Mar 9_ - Economics 100A Lecture #14: Tuesday,...

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1 Economics 100A Lecture #14: Tuesday, Mar. 9 1) Government intervention 2) Analysis of an excise tax 3) Consumer surplus, and CV and EV 4) Producer surplus and economic rent 5) Social surplus, social optimum and dead weight loss
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2 (1) Gov’t intervention The visible hand meets the invisible hand Price: Taxes: income, sales, payroll, estate, corporate, tariffs, etc. Subsidies: Price control: ceilings and floors Quantity: Production quotas: agricultural commodities Stockpiling: crude oil reserve Import and export quotas Quality: Product safety: consumer products (CPSC), drugs (FDA) Competence in occupations: state licensing boards Pollution and hazardous materials: EPA Workplace conditions: OSHA
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3 Gov’t intervention (cont’d) Industry structure Entry restrictions: taxis, cable, radio spectrum (FCC) Exit conditions: airline and train routes Merger policy: FTC, DOJ Information (social regulation) Product labeling: alcohol, cigarettes, drugs, nutrition (FDA) Product performance: auto mileage and appliance efficiency (EPA), washing instructions Financial disclosure (e.g., SEC)
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4 Gov’t intervention (cont’d) Alternatives to gov’t intervention The free market Government ownership Seller control (e.g., a cartel or union) Buyer control (e.g., boycotts) Key Policy Questions What is the effect of gov’t intervention on price and quantity? Who gains and who loses, and by how much?
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5 Reasons for intervention Market failure Counteract a market failure (e.g., monopoly power) Internalize an externality (e.g., pollution) Social goals Redistribute income and wealth Promote beneficial activity (e.g., health, education) Politics Generate “rents”
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6 Taxonomy of taxation Types of taxes Excise (or “specific”) tax: $ amount per unit Ex: gasoline tax at pump of 18.4¢ per gallon for state and 18.0¢ per gallon for federal Sales (of “ ad valorem ”) tax: % amount of price Ex: Bay Area’s 8.75% sales tax Lumpsum tax: $ amount per transaction Ex: California business license fee of $800 per year Who collects the tax? Usually the seller collects the tax On occasion, the buyer collects it Ex: consumers supposed to report uncollected sales tax on income tax returns (e.g., Internet purchases from out-of-state vendors) Ex: employers collect the “payroll tax”
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7 Federal gasoline excise tax AVERAGE FEDERAL GAS EXCISE TAX IN U.S. $0 $5,000 $10,000 $15,000 $20,000 $25,000 193 3 1938 1943 1 948 1953 19 58 1963 196 8 1973 197 1983 1988 993 1998 YEAR TAX REVENUE $ M $0.00 $0.02 $0.04 $0.06 $0.08 $0.10 $0.12 $0.14 $0.16 $0.18 $0.20 EXCISE TAX PER G A TAX REVENUE EXCISE TAX
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8 California cigarette excise tax A Little Cigarette History pre 1989: CA excise tax was 10¢ per pack,
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This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Lecture 14 _Mar 9_ - Economics 100A Lecture #14: Tuesday,...

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