ECON 1 1st EditionExam # 2 Study Guide Lectures: 8 -13 Study Guide: Midterm 2 (May 21)(Based off of lecture notes only; highly recommend reading the book, going through pastlecture notes, and doing the problems)(Not cumulative, but need to know the basics of supply and demand curves and elasticity toknow the rest of the topics covered on this midterm 2)Lecture 8: (April 30)Price Ceilings: a legally set maximum price- To be effective, ceiling has to be below P*- An item we think is priced too high- Results in shortagesA SL BC DQS Q*Rent control: how much you pay for an apartmentThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Consumer Surplus: A, B, 4.00Producer Surplus: B, C, 4.00New CS: A, L, M, 3.50Save $0.50/gallonNew PS: C, M, 3.50Lost moneyLoss of net gain: L, B, M -Dead weight lossGood news: Gas is cheaper for $3.50Bad news: cannot find anyM3.504.0040 applications for 1 apartmentIn control of the supplier's hands now...How to choose? And why choose that one specific couple if they were the second applicant--> First come, first serve--> Personal characteristics -owner's daughter's birthday was on the same day as the wedding date1,5002,000Inefficiencies:1. Shortage2. Reduction in quality3. Search costs --> divert a lot of resources towards something else you are searching for4. Dead weight loss5. Misallocation of resources6. Multiple layers of regulationa. Ways landlords discriminateb. Ability of landlords to reduce the QSPrice Floors: A legal set of minimum prices to be effective, the price floor has to be set above P* sellers would want price floors set above market clearing price Surplus or unemployed Cannot hire someone for less than $8.00/ hourQ*D Q* Q*SLecture 9: (May 2)Price Floor Inefficiencies:SurplusIncreased quality beyond an efficient amount1 408.006.00Misallocations of resourcesLaw 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)Commodity 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 collectedEffects of taxes when Demand is ELASTIC: Surplus 50 cent tax Consumer pays 15 cents Producer pays 35 centsEffects of taxes when Demand is INELASTIC: Surplus is not as large 50 cent tax Consumer pays 40 cents Producer pays 10 cents4.504.154.004.404.504.00Lecture 10: (May 7)Supply Elasticity of Tax Incidence:S^I SI Q^* Q* Red line represents the tax Q^* Q* Larger drop in quantityWedge Short Cut:Amount tax = amount paid by producer + amount paid by consumerInelastic Supply Curve0.50 taxConsumers pay 0.05Producers pay 0.454.504.004.40Quantity in $ drops a lot more0.50 taxConsumer pays 0.45Producer pays 0.053.954.004.454.50ASD Q^* Q*Tax revenues = L, M, N, ODead weight loss = M, N, BLecture 11: (May 9)Income Taxes:S - workers Labor MarketCMNOL= tax (wedge shortcut)NGS = A, B,CProducer surplus is C, B, P*Consumer surplus is A, B, P*Tax is imposed --> L-->O (M --> N)Quantity drops to Q*^Producer surplus is N, O, CConsumer surplus is A, L, MBIf only taking only 0.80 of 1.00No incentive to work as muchTax Fairness:- progressive: the tax rate increases as wealth increases- regressive: the tax rate goes down as wealth increases- proportional: the tax rate is the same for all earners2 Types of Fairness:1. Horizontal equity: people in approx. similar situations will pay approx. the same in tax2. Vertical equity: people in different situations should pay reasonably different levels of tax2 Principles to consider:1. Benefits principle: those who benefit from a government service/ good should be the one to pay the higher taxa. Ex. If a road is built near a factory and the factory benefits it from shipping and transportation purposes, then the factory should pay the taxes for that roadb. If bearing the benefits, then you should pay most/all of the tax2. Ability to pay principle: those with higher incomes should pay more and a higher ratea. Direct link to progressive view of taxesSubsidies:- Reward for a specific activity; goal is try to get the producer to produce more S S* dropped 0.25DEDI4.00PICIWith an inelastic D, the consumer receives more of the subsidy than with an elastic DQ*Lecture 12: (May 14)Conditions for the market to operate efficiently- information is good and inexpensiveo consumers know what prices are and quality of the goodo producers know the cost of resources, technology, and the price consumers are willing to payo if cannot tell, then no signal is involved- property rights are/must be clearly defined and transferrableo if not transferrable, the property is not valuableExample of how a market can operate efficiently:Property ownedUse A: $100,000 for residential area Use B: $300,000 for a hospitalIf transfer is forbidden, the opportunity cost is not lost -won't show up on the supply curveIf transfer is allowed and you don't give up property for Use B, then the opportunity cost is $300,000Directing resources away from what is desired more in order to produce more unitsPS after subsidy is G, L, 4.10CS after subsidy is A, M, 3.85DWL is L, M, ZQ* Q^*MLAG4.103.854.00Property rights allow person to realize costs and benefits of their actionsExample:Graffiti on private home bathroom walls ---> value of house decreasesGraffiti on public bathroom walls ---> no harm to oneself ( no property rights )Externalities:  benefit or cost that is received or incurred by someone other than the buyer or sellerExternal Cost: a cost not paid by the producer S (social cost)S (private cost) S private M External costN D Q^* (100) Q* market (110)Last 10 units cost more than what the consumers valuedExternal cost: cost imposed on someone elseEx. Dumping into the river affects those living down the riverSocial costs: equal to private cost + external costCauses supply curve to shift up*Quantity sold is going to drop$26$1efficient is lessQ* marketQ^*P* market $25$1S social costLP^* efficientP* marketefficientSo, the costs the company imposed on