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Lecture 5 - The Market Do market forces operate so that...

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9/18/2008 1 The Market The market does many things Pricing Quantity Allocation Price (per unit) Do market forces operate so that price and quantity move towards the equilibrium? YES! ($ per unit) Efficient rationing Incentives We explore what happens when the market is restricted Quantity S D Q E P E E Tax Specific (quantity) tax – tax per unit We denote the price demanders pay: P d price suppliers get: P s Before tax: P = P d = P s tax After tax: P d = P s + t We’ll draw the new supply curve in terms of P d Tax Price ($ per unit) S´(+Tax) Tax Tax - Beer Beer Supply curve shifts up by the amount of the tax p d ; p s tax (per unit) = p d - p s expenditure = p d • Q supplier revenue = p • Q Sin tax discourage consumption boost government revenue Revenue Supplier Revenue Quantity S t Consumer Expenditure D P E Q E E Q E ´ P d ´ P s ´ supplier revenue = p s • Q difference is government tax revenue tax revenue larger if demand less sensitive to price
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