Government Interventions

Equilibrium: Price Demand Supply P* Q* Quantity

Government Interventions Price ceilings Price floors Quantity Quotas Commodity Taxes

Price Ceilings Government established maximum selling price. Must be below P* to be binding. Why? Government usually thinks the market price is too high for some reason. Usually end up with…. Shortages! And all the problems they generate.

Price Ceiling & Market Shortage Equilibrium is at P*=17 and Q*=23. Price Supply Quantity Demand Pceiling=$10. At the artificially low price of $10, buyers want to buy 30. PB 17 23 But sellers only want to sell 16. 10 16 Shortage = 14 30 There is a shortage of 14. And then what?

Price Ceiling & Market Shortage With a price ceiling of $10 per unit, there is a shortage of 14 units, that is, only 16 units are supplied. So, then what? Rationing (karne ile verme) Queuing (kuyruk) Black market prices And more…. Shortages vs. Scarcity Price Supply Quantity Demand PB 17 23 10 16 Shortage = 14 30

Scarcity has the meaning of finite amount or limited. Clean air is a good example. Since air can be cleaned at any one time there is only so much clean air. Another example, copper has been used as a metal for several thousand years but there is only so much copper. It can be reused and reused so that it is available but it is always limited given the potential uses uses for it. Copper is always scarce. A shortage has to do with the relationship between the amount the supplier are willing to supply and the given price in a specific time period. Therefore as prices go up, the suppliers will work to supply more of the product and as the prices go down the supplier will cut back the amount they are willing to supply. However if prices are fixed for some reason, say by the government, then the demand (what people want at that price) and the supply may not be equal. Therefore a shortage may occur.

Price Ceiling & Market Shortage Market Shortage: The sellers are in equilibrium in this situation because they can sell everything they want to sell at this price, but buyers are not. Some buyers who cannot obtain the product are willing to offer more, and sellers are always willing to accept a higher price. Therefore, the actions of the buyers, as they compete with each other to obtain the amount that is available, drive the price upward… Price Ceiling & Market Shortage:… The black market price > market price

Price Floors Examples: Government established minimum selling price. Floor must be above P* to be binding. Why? Government usually thinks the market price is too low for some reason. Usually end up with…. Surpluses! And all the problems they create. Examples: supported milk prices & minimum wage laws

Price Floors & Market Surplus Equilibrium is at P*=17 and Q*=23. Price Supply Quantity Demand Pfloor = $25. At the artificially high price of $25, sellers want to sell 31. Surplus = 16 25 15 31 17 23 But buyers only want to buy 15. There is a surplus of 16. And then what?

Price Floors & Market Surplus Market Surplus: In this situation the buyers are in equilibrium because they can buy all they want to buy at the going price. However, the sellers are not in equilibrium and will compete among themselves to get rid of the surplus. Some sellers will be willing to offer their product at a lower price. Buyers are always willing to move down (accept lower prices) the demand curve, so there is a tendency to move downward… Price Floors & Market Surplus: …The black market price < market price

Quantity Quota Government established maximum number of units sold. Qmax must be below Q* to be binding. Why? Government thinks too many units are being traded. Example: import restrictions Usually end up with... Higher prices and more.

Quantity Quotas MURAT 121 P P D D S S Q Q

Commodity Taxes Government sets a tax on transactions. Per unit Ad valorem

An ad valorem tax (Latin for according to value) is a tax based on the value of real estate (gayri menkul, taşınmaz mal)or personal property. An ad valorem tax is typically imposed at the time of a transaction (a sales tax or value-added tax [VAT]), but it may be imposed on an annual basis (real or personal property tax) or in connection with another significant event (inheritance tax, or tariffs ) A tariff may be either tax on imports or exports (trade tariff), . ‘değeri üzerinden alınan vergi anlamında latince sözcük.. örneğin kdv, miktara göre değil malın değeri üzerinden bir orana bağlı olarak alınır.’

Commodity Taxes In The News The Tax Foundation: Gasoline, Cigarette, and Alcohol Taxes