Lecture 2 Flashcards
Price ceilings lead to inefficiency in the form of:
Inefficient allocation of goods to consumers
e.g., flats are not automatically allocated to consumers with a high wtp
Wasted resources
e.g., demanders spend time finding flats
Inefficiently low quality of the good
e.g., wtp for heating system, but landlord cannot recuperate costs
Provide incentive for illegal activities; black markets
e.g., illegal subletting
Inefficiency arising from low quantity traded, resulting in a deadweight loss.
Deadweight loss of policy X
loss in total surplus that occurs if policy X reduces the quantity transacted below the efficient quantity
Quantity control or quota:
an upper limit on the quantity of some good that
can be sold (e.g., tons of milk in Europe till April 1st 2015)
License
gives the owner right to supply a good.
→freely tradable
Demand price of a quantity
the price at which consumers
will demand that quantity.
Supply price of a quantity
the price at which producers will supply that quantity.
Quota rent or wedge
difference = earnings holder license
excise tax
a tax on sales of a good or services
price elasticity of demand
the ratio of the percent change in
the quantity demanded to the percent change in the price as we
move along the demand curve
unit-elastic
if the price elasticity of demand is exactly 1
inelastic
if the price elasticity of demand is less than 1
elastic
if the price elasticity of demand is greater than 1,
What Factors Determine the Price Elasticity of Demand?
• Whether close substitutes are available
(the more substitutes available the higher the PED)
• Whether the good is a necessity or a luxury
(high PED if you can live without the good):
• Time; e.g., oil price shock in ’70s
(PED is higher in the long run than in the short run)
Factors that Determine the Price Elasticity of Supply
• The availability of inputs, e.g., pizza’s
(larger when inputs are easily available)
• Time; e.g. oil
(larger in long run)
