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MID2 NOTES - ECON 1101 Handout Midterm II Notes These notes...

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ECON 1101 Handout: Midterm II Notes These notes are only a partial summary of what was covered in lecture and in homeworks. These notes are not a substitute for your own notes from lecture and I reserve the right to test you on lecture or homework material not listed here. 1 Government Pricing Regulations 1.1 Definitions Price Floor When government sets a minimum price for which a good can be bought or sold. Price Ceiling When government sets a maximum price for which a good can ge bought or sold. Tax Revenue = Per Unit Tax * Amount Sold ie: (Tax* Q tax ) Consumer’s Burden Share of the tax revenue paid by consumers. ( P tax - P * ) Q tax Producers’s Burden Share of the tax revenue paid by producers. ( P * - P tax ) Q tax Consumer’s Benefit Share of the subsidy consumers get. ( P * - P sub ) Q sub Producers’s Benefit Share of the subsidy producers get. ( P sub - P * ) Q sub Tax Wedge The distortion the tax creates between the price consumers pay for a good and the price suppliers receive. The difference goes to the government as tax revenue. 1.2 Concepts Price Floors Binding price floors are set above equilibrium price Binding price floors result in a surplus of the good, quantity supplied greater than quantity demanded. Price Ceilings Binding price ceilings are set below equilibrium price 1
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ECON 1101 - Midterm I Notes Amanda M Michaud Binding price ceilings result in a shortage of the good, quantity supplied less than quantity demanded. Per Unit Taxes Raises the price to consumers ( P D ) Lowers the price to producers ( P S ) Lowers the Quantity sold ( Q tax ) P D , P S , and Q tax are the same no matter whether producers or consumers are taxed. The quantity Q tax imposed by a tax is found by introducing a tax ”wedge” into the standard competitive graph. Sets Q tax such that the following hold: at Q tax Consumers are willing to pay P D at Q tax Producers are willing to sell for P S Where P D - P S = tax The more inelastic party (consumers or producers) bears the larger burden of the tax Tax revenue is greater for goods with inelastic price elasticity of supply or demand. This is because the change in quantity is not very responsive to change in price with goods having inelastic price elasticity of supply or demand. Thus Q tax is not much smaller than Q * making tax revenue = Q tax * tax large. Per Unit Subsidy Lowers the price to consumers ( P D ) Raises the price to producers ( P S ) Raises the Quantity sold ( Q sub ) P D , P S , and Q sub are the same no matter whether producers or consumers are subsidized. The quantity Q sub imposed by a subsidy is found by introducing a subsidy ”wedge” into the standard competitive graph. Sets Q sub such that the following hold: at Q sub Consumers are willing to pay P D at Q sub Producers are willing to sell for P S Where P S - P D = subsidy The more inelastic party (consumers or producers) gains the most from a subsidy.
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