Econ 200: Lecture 10 February 2, 2017

Transcription

1 Econ 200: Lecture 10 February 2, Learning Catalytics Session: TBA 1. Pigovian Taxes and Subsidies and Other Government Solutions 2. The Four Categories of Goods 3. Review of Concepts for Exam

2 Alternatives to Taxation for Solving Externalities The traditional solution to the externality problem is command-and-control: an approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring firms to install specific pollution-control devices. 2

3 Tradable Emissions Permits This is the concept behind tradable emissions permits, also known as cap-and-trade: The government establishes an allowable amount of emissions. Emissions permits are distributed. Firms can trade emissions permits. Firms with high costs of reducing pollution will buy permits form firms with low costs of reducing pollution, ensuring that pollution is reduced at the lowest possible cost. Hence the market is used to achieve efficient pollution reduction. 3

4 Attributes of Goods and Services We have seen that markets are better at providing the efficient level of some goods and services than others. This is related to some important attributes of the goods and services: whether their consumption is rival and/or excludable. Rivalry: The situation that occurs when one person s consuming a unit of a good means no one else can consume it. Excludability: The situation in which anyone who does not pay for a good cannot consume it. 4

5 The Four Categories of Goods The image part with relationship ID rid4 was not found in the file. 5

6 Efficient Provision of the Categories of Goods Markets are good at providing efficient levels of private goods, but not the other types of goods. Why? People can free-ride on public goods, enjoying the benefits from them without paying for them. People have little incentive to conserve common resources, leading them to be over-consumed (tragedy of the commons). Profit-maximization tends to lead too many people to be excluded from quasi-public goods. 6

7 Constructing Market Demand Curves Public Goods The image part with relationship ID rid4 was not found in the file. For a public good add the prices each consumer is willing to pay. Top: Jill is willing to pay $8 per hour for a security guard to provide 10 hours of protection. Middle: Joe is willing to pay $10 for that level of protection. Bottom: P= $18/hour & Q=10 hours will be a point on the demand curve for security guard services. 7

8 Efficient Consumption of a Public Resource Common resources tend to be over-consumed. Why? While people cannot be excluded from the resource, their consumption is rival, depleting the resource for other people. This can be thought of as a negative externality. Ideally, we would make people pay for their consumption, as with Pigovian taxes. When this is not possible, the situation is referred to as the Tragedy of the commons, with the common resource being overused. 8

9 Assume that the market for sriracha sauce can be represented by the following supply and demand equations: P=Q s /10 P=10-Q D /10 The production of each bottle of sriracha sauce creates an external cost of $3 so that the Marginal Social Cost of sriracha production is given by P=3 + Q s /10 1. Find the socially optimal output in this market. 2. Find the output that would be produced in this market without government intervention. 3. Find the deadweight loss if the market produces the output you found in the previous question. 9

10 4. Imagine that the price of chicken breasts increases by $1 per pound after a tax is imposed, and the new quantity demanded is 900,000 pounds per year. If the original equilibrium was at $5/pound and 1 million pounds consumed, what is the elasticity of demand for chicken breasts at that point? 10

11 Assume that Maine and Vermont only produce blueberries (B) and maple syrup (MS). The graphs below show their production possibilities for one year. Maine Vermont Without trade, how many pounds of blueberries are consumed by Maine if they choose to produce and consume 35 thousand gallons of maple syrup. (Note: You actually need to know that both states consume this much maple syrup to answer 6) 6. Now calculate the gains from trade in pounds of blueberries if both states specialize in production according to their comparative advantage and then trade. 11

12 The demand and supply equations for daily smartphones sales in Seattle are: Demand: Q=2,000 2P Supply: Q=3P 7. Calculate the price of smartphones in equilibrium. 8. Calculate the shortage or surplus in the market when a price floor of $650 is imposed by the government. 12

13 Assume that the market for sriracha sauce can be represented by the following supply and demand equations: P=Q s /10 P=10-Q D /10 The production of each bottle of sriracha sauce creates an external cost of $3 so that the Marginal Social Cost of sriracha production is given by P=3 + Q s /10 P, $ per item $8 $6.50 $ S2 = MC social Qe=3,500,000 (Solve 3 + Q s /10 = 10- Q D /10) Qm = 5,000,000 (Solve Q s /10 = 10- Q D /10) Pm=$5 S1 = MC private $3 (amount of negative externality) D D, hundreds of thousands of items/week DWL = $2,250,000,000 13

14 Imagine that the price of chicken breasts increases by $1 per pound after a tax is imposed, and the new quantity demanded is 900,000 pounds per year. If the original equilibrium was at $5/pound and 1 million pounds consumed, what is the elasticity of demand for chicken breasts at that point? Elasticity = %ΔQQ %ΔPP = QQ2 QQ1 1 2 {QQ 2+QQ1} PP2 PP1 1 2 {PP 2+PP1} = $1 $5.5 = 10.5% 18.2% =

15 Assume that Maine and Vermont only produce blueberries (B) and maple syrup (MS). The graphs below show their production possibilities for one year. Find how many pounds of blueberries are produced by Maine if they consume 35k gallons of Maple Syrup. Maine Vermont Opportunity costs: It costs 2lbs of blueberries to produce 1 gallon of MS in Maine Blueberry Production for Maine: 150k lbs - 35k gallons*2lbs/gallon = 80k lbs. Total production under specialization: Blueberries (produced by Maine): 150k lbs. Maple Syrup (produced by Vermont): 70k gallons Gains from trade: B: 150k-35k-80k = 35k lbs. MS: 70k 35k -35k = 0 gallons 15

16 The demand and supply equations for daily smartphones sales in Seattle are: Demand: Q=2,000 2P Supply: Q=3P Qs=Qd P = 3P 5P = 2000 P=400 Q= 1200 Total Economic Surplus = ½ $1000 * $1200 = $ Total surplus from price floor = =

17 Midterm Exam Guidelines No graphing calculators or iphones No hats No bathroom breaks except in emergencies No papers of any kind leave them at home or put them in a bag under your desk No talking, even after your exam is turned in Please arrive and be seated at least 5 minutes early 17

18 Midterm Exam Guidelines Exam covers chapter 1-6 (No Ch 9 / Trade) Please answer questions clearly, neatly, and show all work E.g. DWL= ½ ( )($4-$2) = $100 NOT DWL=$100!!!! Answers will be graded for correctness and understanding of concepts Monday Office Hours 10:30-12 :30 (savery 339) 18

19 Midterm Exam Extra Problems In myeconlab: Go to Chapter Resources (left side nav bar) for additional problems, chapter homework, and quizzes All back of the book questions are here as well as a 10 question quiz for each section of the book. 19

20 Outline of Topics (Note: Exclusion from this list does not mean exclusion from the test) Ch 1: How to graph/slope of the line Calculating percent change What does marginal mean? Ch 2: Comparative advantage and opportunity cost Specialization and gains from trade 20

21 Outline of Topics Ch 3: Demand curves/law of demand Shift in demand Supply curves/law of supply Market equilibrium Shift in supply Changes in equilibrium 21

22 Outline of Topics Ch 6: Elasticity of demand & midpoint theorem Inelastic vs elastic demand (technical definition and intuitive meaning) Demand elasticity and revenue Elasticity of supply & definitions Ch 4: Surplus and efficiency (CS and PS) Price floors and price ceilings how do they work? Graphs, examples, welfare effects (DWL) Taxes - ditto 22

23 Outline of Topics Ch 5: Welfare impacts of externalities/dwl The Coase theorem Pigovian taxes and subsidies 23