94 price supports and production quotas 95 import

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9.4 Price Supports and Production Quotas 9.5 Import Quotas and Tariffs 9.6 The Impact of a Tax or Subsidy 9.1 Evaluating the Gains and Losses from Government Policies Consumer and Producer Surplus -return to supply demand analysis and how it can be applied to a wide variety of economic problems: consumer faced with a purchasing decision, firm faced with planning problem, or gov agency that has to design a policy and evaluate its likely impact. We begin by showing how consumer and PS can be used to study welfare effects of a government policy: who gains & loses from policy, and by how much. We also use CS & PS to demonstrate efficiency of competitive market, how to calculate response of markets to changing economic conditions or gov policies and to evaluate resulting gains and losses to consumers and producers. Review of Consumer and Producer Surplus In an unregulated, competitive market, consumers and producers buy and sell at prevailing market price. But for some consumers, value of good exceeds this market price; they would pay more for the good if they had to. Consumer surplus is total benefit or value that consumers receive beyond what they pay for the good. Because CS measures total net benefit to consumers, measure gain or loss to consumers from a gov intervention by measuring resulting change in CS. Producer surplus is analogous measure for producers. Some producers produce units at a cost just equal to market price. Other units could be produced for less than market price and would still be produced and sold even if market price lower. Producers enjoy a benefit (surplus) from selling those units. For each unit, this surplus is difference between market price producer receives and MC of producing this unit. For market as a whole, PS is area above supply curve up to market price: this benefit lower-cost producers
enjoy by selling at market price. Producer surplus measures total net benefit to producers, measure gain or loss to producers from a gov intervention by measuring resulting change in PS. Application of Consumer and Producer Surplus -welfare effects : Gains and losses to consumers and producers. -deadweight loss : Net loss of total (consumer plus producer) surplus. 1. Change in Consumer Surplus: Some consumers are worse off and others are better off. The ones who are worse off are those who have been rationed out of market because of reduction in production and sales from Qo to Ql' Other consumers, however, can still purchase good (perhaps because they are in right place at right time or are willing to wait in line). These consumers are better off because they can buy good at a lower price (Pmax rather than Po)' Consumers who can still buy good enjoy an increase in CS, which is given by blue rectangle A: measures reduction of price in each unit times number of units consumers are able to buy at lower price. On the other hand, those consumers who can no longer buy good lose surplus; their loss is green triangle B: measures

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