Government Intervention Notes

Government Intervention Notes - Government Intervention o...

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Government Intervention o Governments might decide to influence market outcomes even in the absence of market failures Fair Price? Economists use microeconomics analysis to evaluate alternative policies Controls on Prices o Calculate consumer and producer surplus before control is set o Price Floor A legal minimum on the price at which a good can be sold Ex. Minimum wage laws, some agricultural products Price can increase and cross the price floor; however it cannot be lower than the price floor Two outcomes: Price floor will not be binding (will have some affect on the market outcome) if set below the equilibrium price A binding price floor (set above equilibrium price) o A surplus (XS) bc Qs>Qd o nonprice rationing is an alternative mechanism for rationing the good market price is a tool to help society allocate resources (best allocation mechanism) consumer surplus decrease; producer surplus increase (when you impose a binding price floor) producers get some surplus from consumers [rectangular shape on graph] total surplus decrease o conclusion we can see from the areas on graph There is a resource misallocation as result of the price floor o Too few units of corn are bought and sold
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o RM= quantity that should be produced and consumed-quantity produced and consumed due to the price floor o Q w/o price floor- Q w/ price floor o Size of the resource misallocation Measured in terms of surplus (monetary value) Measure total surplus before price floor and measure TS after price floor…gap between two areas = deadweight loss Deadweight loss to society= overall change in total surplus Loss; not captured by anybody Lost opportunity to conduct trade so consumers and producers benefit from it = CS lost + PS gain Price Floor: Minimum Wage o Best way to reduce poverty? o Labor market Supply: workers Demand: firms o A binding minimum wage Creates surplus of labor (unemployment) Market price (wage) is not allocating resources anymore Effect of a binding minimum wage also depends on the price elasticity of demand: o Market for skilled vs unskilled labor Minimum wage is not binding in the skilled labor market Skilled workers: those individuals that usually have more years of formal education and experience Usually located under the market equilibrium wage and quantity Many minimum wage earners are middle income family teens (poverty?)
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Unskilled labor: relatively young and not many years of experience (if any) o Price Ceilings A legal maximum on the price at which a good can be sold Should help consumer side of the market Ex. Rent controls, gasoline Creates restriction in movement of prices Two outcomes The price ceiling is not binding if set above Equilibrium market price (Pe) Ceiling is ineffective Price ceiling is binding if set below Equilibrium market price (Pe)
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This note was uploaded on 09/14/2011 for the course ECON 1014 taught by Professor Ryan during the Spring '08 term at Missouri (Mizzou).

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Government Intervention Notes - Government Intervention o...

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