Lecture 8Outline of Last Lecture Chapter 4- Efficiency of Markets- Ways in which government might try to (unsuccessfully) increase total surplus - How market equilibrium maximizes total surplus- Why markets typically work so wellChapter 5- The meaning of price controls an quantity controls, two kinds of government intervention in markets- How price controls work and can make a market inefficient- What deadweight loss is- Price Ceilings: How it causes inefficiencies- Why Price Ceilings Exist- Definition of Price FloorOutline of Current Lecture Chapter 5- How Price Floor Works- Inefficiencies caused by price floors- How quantity controls workCurrent LectureMarket Without Government InterventionMarket with a Price FloorWithout government intervention, the market for butter reaches equilibrium at a price of $1 per pound with 10 million pounds of butter bought and soldObtained from “Microeconomics by Krugman and Wells, 3rd Edition.”Microeconomics 2106-If a price floor is set below equilibrium, it will have no effect (nonbinding)-Only a price floor that forces price above equilibrium will have any effect (binding) How Price Floor Causes Inefficiency: persistent surplus that results from a price floor creates missed opportunities that resemble those created by the shortage that results from a price ceiling. These include: Deadweight loss from inefficiently low quantity Inefficient allocation of sales among sellers: those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it Inefficiently high quality: sellers offer high quality goods at a high price even though buyers would prefer a lower quality at a lower price Illegal activityControlling Quantities-Quantity control or quote: is an upper limit on the quantity of good that can be bought or sold. -Quota limit: the total amount of the good that can be legally transacted.-License: gives its owner the right to supply a good-Demand price: of a given quantity is the price at which consumers will demand that quantity-The supply price of a given quantity is the price at which producers will supply that quantity.-A quantity control drives a wedge between the demand price and supply price of the good. Obtained from “Microeconomics by Krugman and Wells, 3rd Edition.”The dark horizontal line represents the government-imposed price floor of $1.20 per pound of butter. The quantity of butter demanded falls to 9 million pounds, and the quantity supplied rises to 12 million pounds, generating a persistent surplus of 3 million pounds of butter.-Wedge: price paid by buyers ends up being higher than that received by sellers.-Quote rent: the difference between demand and supply price at the quota limit. It is equal to the market priceof the license when the licenses are traded.Costs of Quantity Controls-Deadweight loss due to missed mutually beneficial transactions-Incentives for illegal