Chap7 - Krugman and Wells Chapter 7 Steven J. Haider EC201...

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Krugman Krugman and Wells and Wells Chapter 7 Chapter 7 Steven J. Haider EC201 Spring 2010
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EC201-7-p2 Overview Overview Chaps. 4: defined consumer and producer surplus Chapter 5: price and quantity controls These interventions in competitive markets reduced total surplus (i.e., were inefficient)—called dead weight loss Chapter 6: elasticities Measures how responsive one variable is to another This chapter: How do taxes and subsidies affect competitive markets? Makes use of elasticities Result is same as Chap. 5: interventions in competitive markets will cause dead weight loss (Taxes are way more interesting than they sound! Really!)
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EC201-7-p3 Taxes Taxes Of course nobody likes to pay taxes, but everyone likes the benefits We complain if roads aren’t plowed or have potholes We expect police/fire protection We expect high-quality public schools The elderly expect Medicare, Social Security Not if , but how much and how should we Excise tax in a competitive market Excise: a quantity tax (like on cigarettes or gasoline) Effect on a competitive market: reduces efficiency because taxes are just another intervention Other taxes (ad valorem, consumption, income) are more complicated to analyze, but ideas are similar
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EC201-7-p4 Example: hotel rooms Example: hotel rooms Imagine the market for hotel rooms in a city (abstracting from quality differences)
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EC201-7-p5 Example: hotel rooms Example: hotel rooms Tax applied: $40/unit paid by owner 7-2: before vs. after D doesn’t shift S shifts up by $40 Logic: compare suppliers’ behavior at A and B Predicted effect of $40 tax Q=5000 Price paid=$100 x 5000 Price rec’d=$60 x 5000 Gov revenue=$40 x 5000 Note: with taxes we shift up/down rather than left/right
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Example: hotel rooms Example: hotel rooms Tax applied: $40/unit paid by consumer 7-3: before vs. after S doesn’t shift D shifts down by $40 Logic: compare demanders’ behavior at A and B Outcome Q=5000 Price paid=$100 x 5000 Price rec’d=$60 x 5000 Gov revenue=$40 x 5000
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This note was uploaded on 05/18/2010 for the course ECONOMIC Ec 201 taught by Professor Haider during the Spring '10 term at MSU - Iligan Inst of Tech.

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Chap7 - Krugman and Wells Chapter 7 Steven J. Haider EC201...

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