Welfare Analysis



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Session5

Market Power

  • If a market system is not perfectly competitive, market power may result.
    • Market power is the ability to influence prices.
    • Market power can cause markets to be inefficient because it keeps price and quantity from the equilibrium of supply and demand.
    • Perhaps governmental intervention is appropriate in cases where this is an issue?

Externalities

Practice Questions

  • An early freeze in Normandy ruins half of the apple harvest. What happens to consumer surplus in the market for apples? Illustrate your answer with a S/D graph.

Practice Questions

  • Suppose the demand for bread increases. What happens to the producer surplus in the market for bread? Illustrate your answer with a S/D graph.

Practice Questions

  • Assume:
  • Qd= 50 - P
  • Qs= -10 + 0.5P
  • Find Pe and Qe
  • Graph supply and demand
  • Calculate CS, PS, and total surplus
  • Now (in the above question) assume a $30 price ceiling is imposed.
  • Calculate CS, PS, and total surplus in this scenario.
  • How do CS, PS, and TS compare to the previous slide?

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Taxes

Taxes

  • In a free, unregulated market system, market forces establish equilibrium price and exchange quantities.
  • One of the roles of economists is to use their theories to assist in the development of policies.
  • Governments levy taxes to raise revenue for public projects.
  • However
    • Taxes discourage market activity.
    • When a good is taxed, the quantity sold is smaller (due to the law of demand)
    • Buyers and sellers share the tax burden.
    • Generates “dead weight loss” (loss of surplus)

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