1. Principles of Microeconomics Shomu Banerjee
4. Market Interventions
Emory University
Spring 2013

2. Price controls: Ceilings
Ceiling = maximum price
Price 10
Disequilibrium phenomenon
Demand
Supply 4 5 3
Excess demand 2 10
Quantity

3. Price controls: Ceilings10
Producer surplus
Demand
Supply
Consumer surplus 3
Deadweight loss 2 4 10
Quantity

4. Price controls: Floors
Floor = minimum price
Price 10
Disequilibrium phenomenon
Supply
Excess supply 7 4 5
Demand 2 10
Quantity

5. Price controls: Floors10
Producer surplus
Supply 7
Consumer surplus
Deadweight loss
Demand 2 4 10
Quantity

6. Quantity controls: Quotas
Price
Effective Supply
Quota = maximum qty. 10
Equilibrium phenomenon
relative to the effective supply
Supply 7 4 5
Demand 2 10
Quantity

7. Taxes and Subsidies
Two kinds
Per-unit:
Ad valorem:

8. Per-unit taxes on sellers
Price
Tax = $3/unit 10 5 5 10
Quantity

9. Per-unit taxes on sellers: Incidence
BEFORE
Buyer pays:
Seller receives:
Price 10
Demand
Effective supply
AFTER
Buyer pays:
Seller receives: $3 5
Supply 3 2
TAX INCIDENCE
On buyer:
On seller: 4 6 10
Quantity

10. Per-unit taxes on sellers: Welfare
Price 10
Demand
Effective supply 5
Supply 4 6 10
Quantity

11. Per-unit taxes on sellers: Welfare
Price 10
Demand
Effective supply 5 A
Supply 2 A 4 6 10
Quantity

12. Per-unit taxes on buyers
BEFORE
Buyer pays:
Seller receives:
Price 10
Demand
AFTER
Buyer pays:
Seller receives: $3 5
Supply 3 2
TAX INCIDENCE
On buyer:
On seller:
Effective demand 4 6 10
Quantity

13. Per-unit subsidies on sellers
BEFORE
Buyer pays:
Seller receives:
Price 10
Demand
Supply
AFTER
Buyer pays:
Seller receives: 6 $3 5 3
Effective
supply
SUBSIDY INCIDENCE
On buyer:
On seller: 4 6 10
Quantity

14. Per-unit subsidies on sellers: Welfare
Price
Quantity 10
Price 4 5 3
Supply
Demand
Effective
supply 6 $3 A D 10
Demand
Supply A $3 5 D B 3
Effective
supply C 6 10
Quantity

15. Market under/over production
GFT = A
DWL = D
GFT = G – D
DWL = D
Price
Price 10 10
Demand
Supply
Demand
Supply A G D 5 5 D 2 4 10 4 6 10
Quantity
Quantity

16. WSJ article facts
Japan could have sold almost 1 million more cars in 1984
The quotas increased the price of Japanese cars by $1,300 in 1984
The quotas increased the price of US cars by $659 in 1984
The US auto industry has become more efficient: it takes hours to make a car, down from hours

17. International free trade
Autarky
Free trade
Price 10
Domestic demand
Domestic supply 4 2
World supply 2 4 6 10
Quantity

18. International trade with tariff
Free trade
OLD
NEW
Trade with tariff
Price 10
Domestic demand
Domestic supply a
Effective
world supply 3 b c d e 2 f
World supply 3 5 6 10
Quantity