1. Demand & Supply: Equilibrium & Applications Lecture 7
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 15, 2017

2. Final Exam Announcement for 1110 Spring 2017
Final Exam Schedule for Spring 2017 Has Been Posted
Our final is slotted for Saturday May 20 at 2:00pm.
Everyone should be prepared to take the final on that day and time.
The makeup final the next week – on Monday May 22 at 2pm - will only be for people who qualify under Cornell’s guidelines OR for people who come and see me in person with extremely compelling reasons. Note that I am very very tough on this. Papers that are due at the end of the term do not count as extremely compelling since you know they are due and have plenty of time to get them done. So don’t procrastinate! Also make sure you carefully read Cornell’s guidelines – many people seem to misinterpret them.
See:
Final is cumulative.

3. 4 Classic Government Interventions
Price Floors
Price Ceilings
Quantity Quotas
Commodity Taxes
Ambrogio Lorenzetti, The Effects of Good Government in the city, Siena Italy, circa 1338

4. 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.
Examples:
Gas price ceilings
Apartment rent control

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

6. Quantity Quotas 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.

7. Quantity Quotas P P D D S S Q Q 7

8. Commodity Taxes
“Sugar, rum and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation.”
Adam Smith, “The Wealth of Nations,” 1776
Government sets a tax on transactions.
Per unit
Ad valorem

9. i>clicker question
Consider the market for automobile gasoline – i.e., gas. Suppose the government place a tax a $2/gallon on gas traded. Suppose the government collects its tax revenue from sellers of gas. If this is the case then which one of the following is true?
The market price of gas will go up by $2/gallon, thereby sticking gas buyers with the tax.
The market price of gas will go down by $2/gallon, thereby sticking gas sellers with the tax.
The market price of gas will stay the same and the government will collect no tax revenue.
The buyers and sellers of gas will split the tax 50/50.
None of the above are necessarily true.

10. Economic Price Incidence of a Per Unit Commodity Tax (EPI)
Before the tax
Market price
Demand price
Supply price
After the tax
Economic Price Incidence
EPI on demanders
EPI on suppliers
Two Results
Government decides who it will collect the tax revenue from (the statutory incidence).
The market decides who will really pay the tax (the economic price incidence).

11. EPI of a Per Unit Commodity Tax
Tax=10₵/gal
Collected from suppliers.
Price
Supply A
Demand
Quantity

12. EPI of a Per Unit Commodity Tax
Tax=10₵/gal
Collected from suppliers.
Price
Supply A
Demand
Quantity

13. EPI of a Per Unit Commodity Tax
Would it have made a difference if we collected the tax from demanders instead of suppliers?
A. Yes
B. No P S
Do demanders and suppliers always share the EPI of a commodity tax 40/60?
NO! D Q

14. i>clicker question
Suppose the demand curve in market X is vertical. Suppose the supply curve in market X is typical. Suppose a tax of $t/unit is levied on X and it is legally collected from suppliers. In this case which one of the following is true?
Suppliers bear all the EPI of the tax.
Demanders bear all the EPI of the tax.
No one bears the EPI of the tax.
Demanders and suppliers equally split the EPI of the tax.
Demanders and suppliers share in some way the EPI of the tax. P D S Q

15. i>clicker question
Suppose the supply curve in market X is vertical. Suppose the demand curve in market X is typical. Suppose a tax of $t/unit is levied on X and it is legally collected from suppliers. In this case which one of the following is true?
Suppliers bear all the EPI of the tax.
Demanders bear all the EPI of the tax.
No one bears the EPI of the tax.
Demanders and suppliers equally split the EPI of the tax.
Demanders and suppliers share in some way the EPI of the tax. P S D Q

16. EPI of a Per Unit Commodity Tax Try These Cases On Your Own!Q Q

17. Commodity Taxes In The News
Sodas a Tempting Tax Target
The Tax Foundation: State Sales, Gasoline, Cigarette, and Alcohol Taxes
Top 12 weirdest tax rules around the world
Karis Hustad, Friday, 14 Feb 2014 | 2:45 PM ETChristian Science Monitor
5. Sweden: Baby names need tax agency approval
Choosing a name for your new son or daughter is a difficult decision, one that requires at least the mother and father to be in agreement. In Sweden there is one more necessary party: the Swedish tax agency.
Swedish people are required to have their child's name approved by the Swedish tax agency before the child turns five. If parents fail to do so, they can be fined up to 5,000 kroner (or $770). The law originally was put in place in 1982, reportedly to prevent citizens from using royal names, but the law states the rationale is that by approving the name the tax agency can protect a child from an offensive or confusing name.
What kind of names are unacceptable? The tax agency has rejected "Ikea" (due to potential confusion) and "Allah" (due to potential religious offense), as well as "Brfxxccxxmnpcccclllmmnprxvclmnckssqlbb11116", which one child's parents attempted to name their child in protest of the law. However, "Google" and "Lego" were recently allowed.

18. How About a Per Unit Commodity Subsidy?
See if you can graph it and analyze it! $P
Supply
Demand
Quantity

19. Comments On Our Market Model So Far...
Demand and Supply
Equilibrium
Comparative Statics
Floors
Ceilings
Quotas
Taxes

20. Surplus Measures: Consumers’ & Producers’ & Net Social
Goal: to measure the gains from trade in $...
and more
Three concepts to introduce:
Consumers’ Surplus (CS)
Producers’ Surplus (PS)
Net Social Surplus (NSS)

21. This Old House Old address: 133 Tompkins St.
New address: 132 Tompkins St.
Problem: We bought the new house before selling the old one.
So... suppose...
Our minimum selling price = $55,000.
Potential buyer Abe: His maximum buying price = $45,000.
So, no deal with Abe.

22. Selling Our OLD House Suppose, a potential (and last) buyer Betty.
Her maximum price = $95,000.
Remember: Our minimum selling price = $55,000.
Trade should occur!
Net social surplus on trade = $40,000
Division of surplus to the Wissink’s and to Betty depends on the strike price - what we sell the house for.
Suppose we sold it for $90,000.
HA!
Consumer’s surplus=$5,000
Producer’s surplus=$35,000.
What did we sell it for?
Don’t ask!