CDAE Class 27 Dec. 4 Last class: 8. Perfectively competitive markets 9. Policy analysis Today: 9. Policy analysis Class evaluation Quiz 8 (optional quiz for extra credits) Review for the final exam Next class: No class Thursday

CDAE Class 27 Dec. 4 Important dates: Problem set 7: due Thursday, Dec. 6 (Drop to my mailbox in Morrill Hall and you can check the answer key in the class website Friday, Dec. 7) Quiz 8 for extra credits: due Thursday, Dec. 6 (Drop to my mailbox in Morrill Hall and you can pick up your quiz Friday, Dec. 7) Final exam: 3:30-6:30pm, Tuesday, Dec. 11 (Chapter 5 – Chapter 9)

9. Policy analysis 9.1. Consumer and producer surplus 9.2. Impact of price interventions 9.3. Tax incidence analysis 9.4. Trade restrictions 9.5. Applications

9.1. Consumer and producer surplus (1) Consumer surplus (CS) (2) Producer surplus (PS) (3) Economic efficiency (Fig. 9.1.) The sum of producer surplus and consumer surplus is at the maximum when the market is at equilibrium. (4) How to estimate consumer & producer surplus? e.g., Q D = 10 - P and Q S = 0.5 P - 2 At the equilibrium: Q* = 2 and P* = 8 Consumer surplus = 0.5 x 2 x 2 = 2 Producer surplus = 0.5 x 4 x 2 = 4

9.1. Consumer and producer surplus (5) How to calculate the changes in CS and PS? -- A production quota of q < A sales tax of $0.5 per unit? Question: what should be the tax rate per unit if the government wants to reduce the quantity to 1.8 units?

9.2. Impact of price interventions (1) Price interventions: (2) Impacts of a price ceiling -- If the ceiling price is above the equ. price -- If the ceiling price is below the equ. price Quantity Price Consumer surplus Producer surplus Efficiency -- Examples:

9.2. Impact of price interventions (3) Impacts of a price floor -- If the floor price is below the equilibrium price -- If the floor price is above the equ. price Quantity Price Consumer surplus Producer surplus Efficiency -- Examples

9.3. Tax incidence (1) Tax incidence theory: The study of the final burden of a tax after considering all market reactions to it. (2) Graphical analysis -- A general analysis -- Importance of demand and supply elasticities -- who will share more of a tax? -- If demand is relatively more elastic, consumers will share relatively less of a tax. -- If supply is relatively more elastic, producers will share relatively less of a tax.

9.3. Tax incidence (3) Mathematical analysis Supply:Qs = P Demand:Qd = P (a) Market equilibrium: Q* = P* = CS = PS =CS + PS = (b) Impacts of a tax of $1.5 per unit Q** =Pc =Pp = New CS =New PS =Tax revenue = Changes in CS = Change in PS = Change in efficiency (deadweight loss) =

Take home exercise Suppose a market has the following supply & demand: Supply:Qs = P Demand:Qd = P (a) Market equilibrium without any tax: Q* = P* = CS = PS =CS + PS = (b) Impacts of a tax of $2.5 per unit Q** =Pc =Pp = New CS =New PS = Tax revenue = Changes in CS =Change in PS = Change in (CS+PS+Tax revenue) =

9.4. Trade restrictions (1) Trade between two countries (2) Excess supply and excess demand (3) Impact of international trade ( compared to no trade ) Importer Exporter Domestic supply   Domestic demand   Domestic price   Consumer surplus (CS)   Producer surplus (PS)   Sum of CS and PS  

9.4. Trade restrictions (4) Impact of trade restrictions (e.g., import tax) (compared to free trade) ImporterExporter Domestic production   Domestic demand   Domestic price   Consumer surplus (CS)   Producer surplus (PS)   Tax revenue (T)  -- Sum of CS, PS and T  

CDAE 254 Final Exam 1. What will be covered in the exam? 2. What will be the format? 3. What are the study materials and practice problems? 4. What do you need to bring to the exam? 5. Suggestions

CDAE 254 Final Exam 1. What will be covered in the exam? Approximate distribution: Chapter 5 20 – 25% Chapter 6 20 – 25% Chapter 725 – 30% Chapter 815 – 20% Chapter 910 – 15%

CDAE 254 Final Exam 2. What will be the format? -- Multiple-choice questions % -- Short-answer questions % -- Problems % -- Graphical analysis %

CDAE 254 Final Exam 3. What are the study materials and practice problems? Quizzes 5-8 Class exercises Class examples Lecture notes (class 16 – class 27) Problem sets Textbook (chapter 5 – Chapter 9)

CDAE 254 Final Exam 4. What do you need to bring to the exam? -- A formula sheet: one page (8x11.5) and one side, formulas and variable definitions only. -- Your calculator -- A ruler will be helpful

Midterm exam 5. Suggestions a. Go over each quiz and make sure you understand and know how to answer every question in every quiz b. Go over each class exercise and make sure you understand and know how to answer every question c. Go over the lecture notes, especially for the classes you missed d. Go over your problem sets and Chapters 5-9 of the textbook e. Study hard and feel confident!