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Unformatted text preview: 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 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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This note was uploaded on 10/05/2011 for the course ECON 1101 taught by Professor Someguy during the Spring '07 term at Minnesota.
- Spring '07