chapter 3 from the book: The Analysis of Competitive Markets

Question 1

what do government imposed price ceilings do?

Answer 1

cause the quantity of a good demanded to rise (at the lower price, consumers want to buy more)

the quantity supplied to fall (producers are not willing to supply as much at the lower price)

creates a shortage

Question 2

what must we take into account with government imposed price ceilings other than the consumers that managed to get their hands on the goods at a lower price?

Answer 2

we must take into account those who cannot obtain the good, how much better off are consumers as a whole?

if we lump consumers and producers together, will their total welfare be greater or lower, and by how much?

Question 3

consumer surplus

Answer 3

total benefit or value that consumers receive beyond what they pay for the good

the area below the demand curve down to the market price

Question 4

how can we measure the overall gain or loss to consumers from a government intervention?

Answer 4

by measuring the resulting change in consumer surplus

Question 5

producer surplus

Answer 5

total benefit or value that producers receive beyond what they sell for the good

the area above the supply curve up to the market price

Question 6

how can we measure the overall gain or loss to producers from a government intervention?

Answer 6

by measuring the resulting change in producer surplus

Question 7

which consumers are worse off with imposing a price ceiling?

Answer 7

those who have been rationed out of the market because of the reduction in production and sales

reduction in production and sales from Q0 to Q1

Question 8

which consumers are better off with imposing a price ceiling?

Answer 8

those that manage to buy at the Pmax

their personal consumer surplus increased

Question 9

how do you find consumer surplus with government imposed price ceiling?

Answer 9

Original surplus - consumer loss + additional surplus

Original triangle - triangle B + Rectangle A

Question 10

what does price ceiling do do producers?

Answer 10

some producers (those with relatively lower costs) will stay in the market but will receive a lower price for their output,

other producers will leave the market

both groups will lose producer surplus

Question 11

what is the surplus lost by producers in a price ceiling?

Answer 11

the surplus gained by consumers (rectangle A) + the drop in production (triangle C)

surplus change: - (A + C)

Question 12

with an imposed price ceiling, is total surplus increased or decreased?

Answer 12

it is decreased

Question 13

how do you call the loss to surlus?

Answer 13

deadweight loss

Question 14

what causes the deadweight loss given by a imposed price ceiling?

Answer 14

an inefficiency caused by price controls

the loss in producer surplus exceeds the gain in consumer surplus

Question 15

how do you find the deadweight loss given by a imposed price ceiling?

Answer 15

triangles B + C

Question 16

economic efficiency

Answer 16

the maximization of aggregate consumer and producer surplus

Question 17

market failure

Answer 17

Situation
in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers

does not maximize aggregate consumer and producer surplus

Question 18

what are the 2 important instances in which market failures can occur

Answer 18

externalities

lack of information

Question 19

externality

Answer 19

Action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price

Question 20

how can lack of information lead to market failure

Answer 20

cannot make utility-maximizing purchasing decisions

Question 21

what constitutes the deadweight loss of an imposed price floor?

Answer 21

triangles B and C

Question 22

with an imposed price floor, what happens with consumer surplus? why?

Answer 22

it is reduced by rectangle A and triangle B

consumer surplus loss: A + C

because those that buy the product now have to pay more (A) and some decided to vag the trade (B)

Consumers clearly are worse off as a result of this policy

Question 23

with an imposed price floor, what happens with producer surplus? why?

Answer 23

their surplus is increased by rectangle A because they sell at a higher price

their surplus is also reduced by rectangle C because consumers don’t buy as many products

they also don’t produce what they could produce at that same imposed price (creating a trapezoid from the quantity supplied to the quantity that should be supplied under the supply curve)

this is also a surplus loss

overall, producers also face more surplus loss than gains

Question 24

price supports

Answer 24

Price set by government above free-market level and maintained by governmental purchases of excess supply.

Question 25

what is the effect ofnconsumer surplus with a price support? why?

Answer 25

surplus loss: rectangle A + triangle B

because consumers buy the same that what they would have bough with a price floor, so basically less

government buys the rest

Question 26

what is the effect on producer surplus with a price support?

Answer 26

producers gain

Producers are now selling a larger quantity

producer surplus gain: rectangle A + triangle B + triangle D

Question 27

how is the government affected by a price support?

Answer 27

they have to buy the surplus which is a cost to them

Q2 - Q1 * Ps which = rectangle

Question 28

what is the deadweight loss of a price support?

Answer 28

rectangle of the cost government pays - triangle D

Question 29

production quotas

Answer 29

reducing supply

Question 30

how does a production quotas work?

Answer 30

quantity supplied is reduced

the price consumers pay at that quantity supplied is higher than the market clearing price

sp

Question 31

what is the effect of a production quota on consumer surplus? why?

Answer 31

reduction by rectangle A and triangle B

consumers pay more for less quantity

not every consumer is now in the market

Question 32

what is the effect of a production quota on producer surplus? why?

Answer 32

they gain rectangle A because consumers pay a higher price

they lose triangle C because they produce less than the equilibrium quantity

they receiving payments from government (B + C + D)

A - C + B + C + D

= A + B + D

Question 33

what is the deadweight loss with production quotas

Answer 33

triangles B and C which is what consumers and producers lose

Question 34

what is the effect of an incentive on producer surplus? why?

Answer 34

hey gain rectangle A because consumers pay a higher price

they lose triangle C because they produce less than the equilibrium quantity

they receiving payments from government (B + C + D)

A - C + B + C + D

= A + B + D

Question 35

what is the cost to the government for the incentive?

Answer 35

the payment sufficient to give farmers an incentive to reduce output to Q1

Question 36

how big must the government incentives be?

Answer 36

incentive must be at least as large as the additional profit that could be made

basically, at least B + C + D

Question 37

do producers win more money with price support or incentive?

Answer 37

none, they win the same

Question 38

do consumers lose more surplus with price support or incentive?

Answer 38

none, they lose the same

Question 39

does a price support or incentive cost more tp the governement?

Answer 39

depends on wether B + C + D of an incentive is more or less than the (Q2 − Q1)Ps rectangle of price surpport

Question 40

what is the deadweight loss created by the government incentive?

Answer 40

triangles B + C

Question 41

import quota

Answer 41

limit on the quantity of a good that can be imported

Question 42

tariff

Answer 42

Tax on an imported good

Question 43

why do countries use import quotas and tarifs

Answer 43

to keep the domestic price of a product above world levels

enable the domestic industry to enjoy higher profits than it would under free trade

Question 44

what is the impact of a import quota on consumer surplus if the quota is of 0 imports?

Answer 44

consumer surplus is reduced

trapezoid A + triangle B are part of the surplus loss because consumers now pay more since the price increased

triangle C also a loss because there are less consumers buying

total loss for consumers: A + B + C

Question 45

what does an a import quota of 0 do to the price and quantity supplied and demanded

Answer 45

quantity demanded is reduced

quantity supplied is increased

these meet at the equilibrium

an equilibrium price higher than the world price is achieved

Question 46

what is the impact of a import quota on producer surplus if the quota is of 0 imports?

Answer 46

producer surplus is the trapezoid A

Output is now higher (Q0 instead of Qs) and is sold at a higher price (P0 instead of Pw)

Question 47

how much deadweight loss is created by an import quota of 0?

Answer 47

B + C

Question 48

can a tariff make that imports are 0? if so, how?

Answer 48

yeee

The tariff would have to be equal to or greater than the difference between P0 and Pw

Question 49

is there a difference between an import quota of 0 and a tariff big enough that imports are 0?

Answer 49

nah boy

there will be no imports and, therefore, no government revenue from tariff collections

the effect on consumers and producers would be the same as with a quota

Question 50

what is the effect of a tariff that does not reduce imports to 0 on consumer surplus?

Answer 50

reduces consumer surplus by A + B + C + D

Question 51

what is the effect of a tariff that does not reduce imports to 0 on producer surplus?

Answer 51

it increases by the trapezoid A

Question 52

what is the revenue for the government from a tariff that does not reduce imports to 0 on producer surplus?

Answer 52

rectangle D

it is the amount of tariff * (new Qd + new Qs)

Question 53

what is the deadweight loss from a tariff that does not reduce imports to 0 on producer surplus?

Answer 53

triangle B + triangle C

B is the loss from domestic overproduction

C is the loss from too little consumption

Question 54

what is the deadweight loss from a quota that does not reduce imports to 0 on producer surplus?

Answer 54

triangle B + triangle C + rectangle D

B is the loss from domestic overproduction

C is the loss from too little consumption

rectangle D is the money the government does not collect, that instead goes as profits to foreign producers

Question 55

what is the revenue for the government from a quota that does not reduce imports to 0 on producer surplus?

Answer 55

none bruv

Question 56

on who falls the burden of a tax?

Answer 56

partly on the consumer and partly on the producer

Question 57

specific tax

Answer 57

tax of a certain amount of money per unit sold

Question 58

what are the 4 conditions so that a market clears after a specific tax is implemented?

Answer 58

1. The quantity sold and the buyer’s price Pb must lie on the demand curve (because buyers are interested only in the price they must pay).
2. The quantity sold and the seller’s price Ps must lie on the supply curve (because sellers are concerned only with the amount of money they receive net of the tax).
3. The quantity demanded must equal the quantity supplied (Q1)
4. The difference between the price the buyer pays and the price the seller
   receives must equal the tax t

Question 59

how does a specific tax affect consumer surplus?

Answer 59

consumer surplus is reduced by rectangle A because consumers pay more than the market equilibrium

it is reduced by triangle B because they consume less

Question 60

how does a specific tax affect producer surplus?

Answer 60

surplus is reduced by rectangle D because producers are paid less than equilibrium

surplus is reduced by triangle C because there is less production

Question 61

how does a specific tax affect the governement?

Answer 61

their revenues is the sum of rectangles A and D

Question 62

what is the deadweight loss created by a specific tax?

Answer 62

triangles C + D

Question 63

usually, how is the burden of the tax shared by consumers and producers?

Answer 63

almost evenly

Question 64

how is the burden of the tax shared by consumers and producers in an inelastic demand?

Answer 64

mostly on consumers

Question 65

how is the burden of the tax shared by consumers and producers in an elastic demand?

Answer 65

mostly on producers

Question 66

Pass-through fraction

Answer 66

tells us what fraction of the tax is “passed through” to consumers in the form of higher prices

Question 67

Pass-through fraction formula and meaning

Answer 67

Es / (Es - Ed)

when its 1, consumers are the ones taking L

when its 0, producers are the ones taking L

Question 68

The fraction of the tax that producers bear formula?

Answer 68

− Ed / (Es − Ed)

Question 69

subsidy

Answer 69

payment reducing the buyer’s price below the seller’s price;

i.e., a negative tax

Question 70

how to find the amount of a subsidy?

Answer 70

the difference between the buyer’s price and producer’s price

Question 71

if the supply and demand curve are both equally elastic, who benefits from subsidies?

Answer 71

buyers and producers benefit relatively the same

Question 72

what are the 4 conditions for the subsidy to work?

Answer 72

QD = QD(Pb)

QS = QS(Ps)

QD = QS

Ps - Pb = s