ECON 1101 1st Edition Lecture 13 Outline of Last Lecture I Subsidies II Application of Taxes Medicare and Social Security III Intro to Price Ceilings Outline of Current Lecture II Price Ceilings a Rationing III Cap and Trade Current Lecture Price Ceilings What is consumer surplus with price ceilings depends on how widgets are rationed EX perfectly efficient rationing where ones who value the product most gets the widget in comparison to perfectly inefficient rationing those who value the product the least get to buy the widget Uniform rationing spreads out consumers from both ends of the spectrum Low Consumer Surplus inefficient rationing High consumer surplus efficient rationing What happens if price ceiling is ABOVE the equilibrium price NOTHING The price ceiling would be considered non binding If it is a price floor and is BELOW equilibrium it is also non binding because it does not have effect on the price A free market is efficient With price control there is not only a distortion in quantity but WHO gets to sell assuming it is binding A price control is more inefficient than a tax or subsidy Consumer surplus in price control depends on WHO you cut out of the market Uniform rationing is where everyone gets the same opportunity to consume Cap and Trade These 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 The government issues a quota Imagine this to be a sheet of paper saying you are allowed to sell a unit To produce a unit the seller needs a quota Producers can trade quotas in the quota exchange It is free to buy and sell quotas in the quota exchange Ex farm sells entire farm for 5 6 million 2 8 million of the cost coming from the amount of quotas included with the farm Quotas choose QUANTITY then lets price do its thing Quota is like the cost to produce What is the equilibrium value of quota The amount must be enough to have the desired quantity sold be indifferent in price The quota value forces most efficient suppliers to sell Surplus with quota is the same as tax surplus Why are quotas inefficient Because they are the same idea as tax General principle 3 is in violation efficient equilibrium If quotas were not tradeable then it is even MORE inefficient to have them because general principle 2 is also in violation efficient production
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