Lecture06 - Lecture 6: Eect of Government Policies Perlo...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 6: E/ect of Government Policies Perlo/ Chapter 5 Vladimir Petkov VUW 19 March 2010 Vladimir Petkov (VUW) Lecture 6: E/ect of Government Policies 19 March 2010 1 ± 26
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Quotas Sometimes the government may impose a limit on how much of a good a consumer can buy. E.g. during emergencies some essential commodities (food, water, gasoline) may be rationed. A quota will give rise to a "kinked" budget constraint. The budget line becomes vertical (horizontal) at the quota. If the quota is e/ective (i.e. the maximum quantity is binding), the optimal consumption bundle will be at the kink. The consumer will be worse o/. She will end up on a lower indi/erence curve. Vladimir Petkov (VUW) Lecture 6: E/ect of Government Policies 19 March 2010 2 ± 26
Background image of page 2
Quotas (Continued) In this example, the quota is set at q 1 = 8 . The consumer moves from I 1 to I 2 . This is equivalent to an income reduction that corresponds to the budget line L 3 . Vladimir Petkov (VUW) Lecture 6: E/ect of Government Policies 19 March 2010 3 ± 26
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Food Stamps Essentially the consumers are given extra income, which they can spend only on a particular good (food). Food stamps are very common in the US: $33.1 billion given to 29.1 million people in 2006. Food stamps also generate a "kinked" budget constraint. If the consumer used to buy less food than the food stamps he is given, he will end up consuming at the kink. The consumer is now on a higher indi/erence curve. However , she would have been even better o/ if we just gave her the income that would make the new consumption bundle a/ordable! That would allow her to substitute food for other goods. Vladimir Petkov (VUW) Lecture 6: E/ect of Government Policies 19 March 2010 4 ± 26
Background image of page 4
Food Stamps (Continued) On the graph below, the consumer gets $100 worth of food stamps. Note that she would have been better o/ if we just gave her $100. Vladimir Petkov (VUW) Lecture 6: E/ect of Government Policies 19 March 2010 5 ± 26
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Child-care subsidies allow poor parents to work and provide better for themselves and their children. In the US, chid-care expenses absorb between 6% and 25% of family earnings. Child-care subsidies basically reduce the e/ective price of child care. The budget constraint rotates outward. With child-care subsidies, the consumer ends up on a higher indi/erence curve. If goods are normal, more of them will be consumed. However , the family would have been even better of if it was given the income that would allow it to buy the new bundle. Then it would be able to substitute child care for other goods, and thus end up on an even higher indi/erence curve. Vladimir Petkov (VUW)
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/24/2011 for the course ECON 201 taught by Professor Paulclacott during the Fall '10 term at Victoria Wellington.

Page1 / 26

Lecture06 - Lecture 6: Eect of Government Policies Perlo...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online