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slides_class2 - Managerial Economics – Class 2 1....

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Unformatted text preview: Managerial Economics – Class 2 1. Government Intervention 2. Elasticity 3. Quantitative Demand Analysis Government Intervention Governments intervene in markets in many ways: import quotas price ceilings price floors taxes subsidies A full analysis of such policies is beyond our time limitations. I will focus on: price floors price ceilings taxes Price Ceilings and Floors Governments sometimes impose price boundaries, restricting the prices for goods or services. Some examples: Rent controls (ceiling) Minimum wage laws (floor) What happens when the government hinders the market from achieving its natural equilibrium? Punchline: Price ceilings and floors tend to result in a loss of efficiency (a decrease in the total surplus in the market) Price Ceilings and Floors Example: Consider a price ceiling of $4/gallon on gasoline shortage $4 $7 112 160 52 Price in $/gallon Supply of gasoline Demand for gasoline 1,000,000s gallons/month Welfare Effect of Price Ceiling in the Gasoline Market Gray area = “ Deadweight loss ” Q S at $4 Q D at $4 Taxes To keep things simple I assume the following: 1. Taxes are a fixed amount per unit of the good 2. The seller of the good owes tax to the government out of its revenues 3. The price of the good includes the tax Suppose the government decides to tax beer. There is some fixed tax amount, say $1, per 6-pack. Brewers sell the 6-packs and then report to the government how many were sold - they remit a payment of $1 per 6-pack sold. If the price/6-pack is $7, then $1 of this goes to the government and $6 is kept by the brewer. Taxes Our assumptions allow us to simply model a tax as an upward shift in the supply curve. Key reasoning : Think of the supply curve as measuring the minimum price necessary to induce suppliers to produce each additional unit. When a $1 tax per 6-pack is imposed, this minimum price simply increases by $1 for every unit. Graphically, the supply curve shifts up by exactly $1 . Taxes Here is the picture that illustrates the effect of a tax of $1 per 6- pack of beer. $6.56 1,000s of 6-packs/month 112 price $7.56 $7 A Tax in the Beer Market shift up by $1 103 Taxes What happens when the tax is imposed? Equilibrium quantity falls from 112 to 103.1 Equilibrium price rises from $7 to $7.56 These specific amounts are determined algebraically (see your problem set) Note that price rises by less than the tax. Important questions regarding the tax: 1. What is the tax revenue? 2. What is the effect on consumer surplus and producer surplus? 3. Does the tax cause a loss in efficiency? Taxes What is the tax revenue?...
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This note was uploaded on 04/30/2011 for the course MBA 862 taught by Professor Phi during the Fall '11 term at Clemson.

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slides_class2 - Managerial Economics – Class 2 1....

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