Economics 1: Principles of microeconomicsWednesday, May 2, 2012Lecture 9Review:-Price Ceiling: legally set maximum to be charged-Inefficiencies- Shortages- Reductions in quality- Increased wait in search costs- Dead weight loss- Resources are not going to higher value user- Additional levels of regulation-Price Floor: legally set minimum price below which you cannot sell the item- Surplus- Minimum wage- Farm programs that support the price of crops- Airline fares during regulationPreview:-Market Effect of Price Ceiling- Inefficiencies of a price ceiling-Overall, how do price controls hinder resources going to the highest use-Taxes- Impact the market- Commodity taxes- Income taxes- Payroll taxesPrice Floor Inefficiencies:P*P^*P~QSQD6.008.00QSQDEconomics 1: Principles of microeconomicsWednesday, May 2, 2012Lecture 91. Surplus2. Increased quality beyond an efficient amount3. Misallocations of resourcesSugar in LA vs. NYC$/lb $/lbHigher value user (3.02) <--------------------------------transferred from low value user (2.97)Law of One Price:-In markets where quantities can be imported and exported and there is no interference on price, then the price of the item should be the same in all markets (+/- transportation costs)Price Ceiling in LA of $2/lb compared to NY with no Price Ceiling Silence the signal w/ the price ceilingMisallocations of resources-Sugar eaters willing to pay $2-4 for sugar but cannot get it4.003.002.003.004.002.002.00Economics 1: Principles of microeconomicsWednesday, May 2, 2012Lecture 9Price Floor in NY of $4.00, no profit if sold in LA that has it at $4.00Commodity Taxes:A per unit tax on a goodCA gas tax = 35 cents/gallonFED gas tax = 18.4 cents/gallon 53.4 cents/gallonIncidence of Tax:Who pays the tax-Not the person from whom the tax is collectedAmount of tax Gas station pays 25 cents/gallonConsumer pays 25 cents/ gallon Incidence of gas is 25 cents eachQS Q*Effect of taxes when Demand is elastic:50 cent taxSurplusConsumer pays 15 centsProducer pays 35 centsEffect of taxes when Demand is inelastic:4.004.504.254.004.154.504.004.50Economics 1: Principles of microeconomicsWednesday, May 2, 2012Lecture 9Surplus not as large50 cent taxConsumer pays 40 centsProducer pays 10
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