ECON 251 1st Edition Lecture 9 Outline of Last Lecture I. TermsII. Options for FairnessIII. Price ControlsIV. Rent ControlV. Price FloorsOutline of Current Lecture I. TermsII. Homework HelpIII. Agricultural Price SupportsIV. TaxesCurrent LectureI. TermsExcise Taxes: per unit taxII. Homework Help (This is a question on the homework many people did not understand)Q = in millionDWL = deadweight lossThese 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.CS = consumer surplusPS = producer surplusDWL = ½(2)(400) = $400CS = ½(1)(100) +(1)(200) = $250PS = ½(100)(1) + (1)(200) = $250III. Agricultural Price SupportsQd = quantity demandedQs = quantity suppliedPL = price floorP = priceP* = price at equilibriumQ* = quantity at equilibriumExample: milkD: Qd = -1/2P + 5 (P = -2Qd + 10)S: Qs = 2P – 2 (P = 1/2Qs + 1)Equilibrium: Qd=Qs-1/2P + 5 = 2P – 2-P + 10 = 4P – 4P* = $2.80Q* = 3.6Q = in millionCS at P = 2.80 ½(3.6)(10 - 2.80) = 12.96PS at P = 2.80 ½(3.6)(2.80 - 1) = 3.24CS + PS = $16.2millionDWL = ½(0.4)(1) = $0.2million@ P = $3 – Qd < Qs = surplus = (4-3.5) = 0.5m The government buys the surplus, but this causes problemsInstead of the government buying the surplus, they pay the farmers as if they had produced the surplus, (so the government isn’t stuck with having to get rid of the surplus product)Q = in millionCS = ½(3.5)(10-3) – ½(0.5)(1) = $12 millionPS = ½(4)(2) = $4 millionCS + PS = 12 + 4 = 16 millionPC = must be below equilibrium shortagePL = above equilibriumsurplusDWL from underproduction (unless government is buying surplus)IV. TaxesExcise tax Example: gas, alcohol, cigarettesExample: If your maximum budget for a car is $9500 (MB)If you find a seller who will take a minimum of $8750 (MC)Allocative efficiency requires this exchangeExcise tax = $1000Say that the seller has to pay the tax to the government.Now the minimum (to compensate for the tax) is $9750 = NO DEALTaxes destroy efficiency (right?)Ps = price the seller receivesPr = price the consumer payst = taxesPc = Ps + tD: Qd = -1/375 P + 43 and 1/3 (P = -375Qd + 16250)S: Qs = 1/125 P -50 (P = 125Qs + 6250)-375Qd +1650 = 125Qs + 6250Q* = 20P* = 8750t = $1000 / car-375 Q + 16250 = 125 Q + 7250Q* = 18Pc = 9500Ps = 8500Pc rose from $8750 to $9500 (increase of $750)Ps fell $8750 to $8500 (decrease of $250)Total money to government is
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