Sport Economics & Finance April 8, 2015

Today Rent Taxes Minimum wage

Rent Economic definition Finance definition When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation. Finance definition

Rent Seeking Behavior Transfer of wealth Nothing additional is created Ex. a franchisor wants to make more money Vs.

Rent Seeking Behavior Good or Bad? constructed and carried out by those in power must have the resources to carry out and enforce such behavior. classes such as the hegemonic masculinity benefit from rent seeking behavior this class is of the minority then this behavior can in no way be for the good of the majority

Government Policies That Alter the Private Market Outcome Price Controls Price Ceiling: a legal maximum on the price of a good or service. Example: rent control. Price Floor: a legal minimum on the price of a good or service. Example: minimum wage. Taxes The Government can make buyers or sellers pay a specific amount on each unit bought/sold. 6

Price Floors When the government imposes a price floor, two outcomes are possible. The price floor is not binding if set below the equilibrium price. The price floor is binding if set above the equilibrium price, leading to a surplus. 12 15

A Price Floor That Is Not Binding... Price of Shave-Ice Cone Supply Equilibrium price $3 Price floor 2 Demand 100 Quantity of Shave-Ice Cones Equilibrium quantity 8 17

A Price Floor That Is Binding... Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Price Floor That Is Binding... Price of #2 Wheat Supply Surplus $4 Price floor 80 Quantity demanded 120 Quantity supplied $3 Equilibrium price Demand Quantity of #2 Wheat 8 17

Effects of a Price Floor A price floor prevents supply and demand from moving toward the equilibrium price and quantity. When the market price hits the floor, it can fall no further, and the market price equals the floor price. 15 24

The Market for Apartments Q Rental price of apartments S D $800 300 Equilibrium without price controls Quantity of apartments 11

How Price Ceilings Affect Market Outcomes Q S Price Ceiling $1000 D A price ceiling above the equilibrium price is not binding – has no effect on the market outcome. $800 300 12

How Price Ceilings Affect Market Outcomes Q The equilibrium price ($800) is above the ceiling and therefore illegal. The ceiling is a binding constraint on the price, causes a shortage. S D $800 Price Ceiling $500 250 400 Shortage 13

The Minimum Wage An important example of a price floor is the minimum wage. Minimum wage laws dictate the lowest price possible for labor that any employer may pay.

The Minimum Wage A Free Labor Market Labor supply Labor demand Wage Equilibrium wage Equilibrium employment Labor demand Quantity of Labor

The Minimum Wage A Labor Market with a Minimum Wage Labor supply Labor surplus (unemployment) Minimum wage Quantity demanded Quantity supplied Labor demand Quantity of Labor

Effects of Minimum Wage Less likelihood of health insurance Less training More discrimination in hiring

Taxes The Government levies taxes on many goods & services to raise revenue to pay for national defense, public schools, etc. The Government can make buyers or sellers pay the tax. The tax can be a % of a good’s price, or a specific amount for each unit sold. 18

Effects of a $1.50 per unit tax on buyers A Tax on Buyers A tax on buyers shifts the D curve down by the amount of the tax. Effects of a $1.50 per unit tax on buyers P Q D1 S1 $11.00 PB = D2 Tax 430 $10.00 500 The price buyers pay rises, the price sellers receive falls, equilibrium Q falls. $9.50 PS = 19

Effects of a $1.50 per unit tax on sellers A Tax on Sellers Effects of a $1.50 per unit tax on sellers A tax on sellers shifts the S curve up by the amount of the tax. P Q S2 D1 S1 $11.00 PB = Tax 430 $10.00 500 $9.50 PS = The price buyers pay rises, the price sellers receive falls, equilibrium Q falls. 20

The Outcome Is the Same in Both Cases! The effects on P and Q, and the tax incidence are the same whether the tax is imposed on buyers or sellers! P Q What matters is this: A tax drives a wedge between the price buyers pay and the price sellers receive. D1 S1 PB = $11.00 Tax $10.00 500 PS = $9.50 430 21

SUMMARY A price ceiling is a legal maximum on the price of a good. An example is rent control. If the price ceiling is below the equilibrium price, it is binding and causes a shortage. A price floor is a legal minimum on the price of a good. An example is the minimum wage. If the price floor is above the equilibrium price, it is binding and causes a surplus. The labor surplus caused by the minimum wage is unemployment. 22