1、Supply, Demand, and Government Policies,Economics,P R I N C I P L E S O F,N. Gregory Mankiw,Premium PowerPoint Slides by Ron Cronovich,6,In this chapter, look for the answers to these questions:,What are price ceilings and price floors? What are some examples of each? How do price ceilings and price
2、 floors affect market outcomes? How do taxes affect market outcomes? How do the effects depend on whether the tax is imposed on buyers or sellers? What is the incidence of a tax? What determines the incidence?,1,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,2,Government Policies That Alter the Private Mar
3、ket Outcome,Price controls Price ceiling: a legal maximum on the price of a good or service Example: rent control Price floor: a legal minimum on the price of a good or service Example: minimum wage Taxes The govt can make buyers or sellers pay a specific amount on each unit bought/sold.,We will use
4、 the supply/demand model to see how each policy affects the market outcome (the price buyers pay, the price sellers receive, and eqm quantity).,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,3,EXAMPLE 1: The Market for Apartments,Eqm w/o price controls,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,4,How Price Ce
5、ilings Affect Market Outcomes,A price ceiling above the eqm price is not binding has no effect on the market outcome.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,5,How Price Ceilings Affect Market Outcomes,The eqm price ($800) is above the ceiling and therefore illegal. The ceiling is a binding constrai
6、nt on the price, causes a shortage.,$800,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,6,How Price Ceilings Affect Market Outcomes,In the long run, supply and demand are more price-elastic. So, the shortage is larger.,$800,150,450,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,7,Shortages and Rationing,With a sh
7、ortage, sellers must ration the goods among buyers. Some rationing mechanisms: (1) Long lines (2) Discrimination according to sellers biases These mechanisms are often unfair, and inefficient: the goods do not necessarily go to the buyers who value them most highly. In contrast, when prices are not
8、controlled, the rationing mechanism is efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair).,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,8,EXAMPLE 2: The Market for Unskilled Labor,Eqm w/o price controls,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,9,How Price Flo
9、ors Affect Market Outcomes,A price floor below the eqm price is not binding has no effect on the market outcome.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,10,How Price Floors Affect Market Outcomes,The eqm wage ($4) is below the floor and therefore illegal. The floor is a binding constraint on the wag
10、e, causes a surplus (i.e., unemployment).,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,11,Min wage laws do not affect highly skilled workers. They do affect teen workers. Studies: A 10% increase in the min wage raises teen unemployment by 1-3%.,The Minimum Wage,A C T I V E L E A R N I N G 1 Price control
11、s,Determine effects of: A. $90 price ceiling B. $90 price floor C. $120 price floor,12,A C T I V E L E A R N I N G 1 A. $90 price ceiling,The price falls to $90. Buyers demand 120 rooms, sellers supply 90, leaving a shortage.,13,A C T I V E L E A R N I N G 1 B. $90 price floor,Eqm price is above the
12、 floor, so floor is not binding. P = $100, Q = 100 rooms.,Price floor,14,A C T I V E L E A R N I N G 1 C. $120 price floor,The price rises to $120. Buyers demand 60 rooms, sellers supply 120, causing a surplus.,15,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,16,Evaluating Price Controls,Recall one of the
13、 Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity.,Prices are the signals that guide the allocation of societys resources. This allocation is altered when policymakers restrict prices. Price controls often intended to help the poor, but often hurt more than
14、 help.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,17,Taxes,The govt levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc. The govt can make buyers or sellers pay the tax. The tax can be a % of the goods price, or a specific amount for each unit sold. F
15、or simplicity, we analyze per-unit taxes only.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,18,EXAMPLE 3: The Market for Pizza,Eqm w/o tax,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,19,A Tax on Buyers,The price buyers pay is now $1.50 higher than the market price P. P would have to fall by $1.50 to make buy
16、ers willing to buy same Q as before. E.g., if P falls from $10.00 to $8.50, buyers still willing to purchase 500 pizzas.,Effects of a $1.50 per unit tax on buyers,Hence, a tax on buyers shifts the D curve down by the amount of the tax.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,20,A Tax on Buyers,Effec
17、ts of a $1.50 per unit tax on buyers,New eqm: Q = 450 Sellers receive PS = $9.50 Buyers pay PB = $11.00 Difference between them = $1.50 = tax,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,21,The Incidence of a Tax:,how the burden of a tax is shared among market participants,In our example,buyers pay $1.00
18、 more,sellers get $0.50 less.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,22,A Tax on Sellers,Effects of a $1.50 per unit tax on sellers,The tax effectively raises sellers costs by $1.50 per pizza. Sellers will supply 500 pizzas only if P rises to $11.50, to compensate for this cost increase.,Hence, a t
19、ax on sellers shifts the S curve up by the amount of the tax.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,23,A Tax on Sellers,Effects of a $1.50 per unit tax on sellers,New eqm: Q = 450 Buyers pay PB = $11.00 Sellers receive PS = $9.50 Difference between them = $1.50 = tax,SUPPLY, DEMAND, AND GOVERNMENT
20、 POLICIES,24,The Outcome Is the Same in Both Cases!,What matters is this: A tax drives a wedge between the price buyers pay and the price sellers receive.,450,PB =,PS =,Tax,The effects on P and Q, and the tax incidence are the same whether the tax is imposed on buyers or sellers!,A C T I V E L E A R
21、 N I N G 2 Effects of a tax,Suppose govt imposes a tax on buyers of $30 per room. Find new Q, PB, PS, and incidence of tax.,A C T I V E L E A R N I N G 2 Answers,Q = 80,PB = $110,PS = $80,Incidence buyers: $10 sellers: $20,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,27,Elasticity and Tax Incidence,CASE
22、1: Supply is more elastic than demand,Its easier for sellers than buyers to leave the market. So buyers bear most of the burden of the tax.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,28,Elasticity and Tax Incidence,CASE 2: Demand is more elastic than supply,Its easier for buyers than sellers to leave t
23、he market. Sellers bear most of the burden of the tax.,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,29,CASE STUDY: Who Pays the Luxury Tax?,1990: Congress adopted a luxury tax on yachts, private airplanes, furs, expensive cars, etc. Goal of the tax: raise revenue from those who could most easily afford t
24、o pay wealthy consumers. But who really pays this tax?,SUPPLY, DEMAND, AND GOVERNMENT POLICIES,30,CASE STUDY: Who Pays the Luxury Tax?,The market for yachts,Demand is price-elastic.,In the short run, supply is inelastic.,Hence, companies that build yachts pay most of the tax.,SUPPLY, DEMAND, AND GOV
25、ERNMENT POLICIES,31,CONCLUSION: Government Policies and the Allocation of Resources,Each of the policies in this chapter affects the allocation of societys resources. Example 1: A tax on pizza reduces eqm Q.With less production of pizza, resources (workers, ovens, cheese) will become available to ot
26、her industries. Example 2: A binding minimum wage causes a surplus of workers, a waste of resources. So, its important for policymakers to apply such policies very carefully.,CHAPTER SUMMARY,A price ceiling is a legal maximum on the price of a good. An example is rent control. If the price ceiling i
27、s below the eqm price, it is binding and causes a shortage. A price floor is a legal minimum on the price of a good. An example is the minimum wage. If the price floor is above the eqm price, it is binding and causes a surplus. The labor surplus caused by the minimum wage is unemployment.,32,CHAPTER
28、 SUMMARY,A tax on a good places a wedge between the price buyers pay and the price sellers receive, and causes the eqm quantity to fall, whether the tax is imposed on buyers or sellers. The incidence of a tax is the division of the burden of the tax between buyers and sellers, and does not depend on whether the tax is imposed on buyers or sellers. The incidence of the tax depends on the price elasticities of supply and demand.,33,
