ECON 1101 1st EditionLecture 13Outline of Last Lecture I. SubsidiesII. Application of Taxes: Medicare and Social SecurityIII. Intro to Price CeilingsOutline of Current Lecture II. Price Ceilingsa. RationingIII. Cap and TradeCurrent LecturePrice CeilingsWhat 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 rationingHigh consumer surplus: efficient rationingWhat happens if price ceiling is ABOVE the equilibrium price? NOTHING! The price ceiling wouldbe 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 isbinding)A price control is more inefficient than a tax or subsidyConsumer 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 TradeThese 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
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