Evaluating Government Policy - PowerPoint Presentation

Slide1

Evaluating Government Policy

The Impact of Price Controls and Taxes

First:

Tati is sorry she is sick.

Second:

Great job today! I will post more pics on the website!

Price Controls (pg. 30)

When the

market price

appears to

unfairly hurt either consumers or suppliers

, the

government intervenes

.

However, this can create significant

social costs

.

Examples of price controls:

minimum prices of major food crops (to help farmers)

m

inimum wage or “living wage”

rent controls

Price Ceilings vs Price Floors

A

price ceiling

 is a government-imposed 

price control

,

or

limit,

on how

high

a price is charged for a product. Governments intend price ceilings to

protect consumers

from conditions that could make necessary commodities

unattainable

A

price floor

is a government-imposed

price control

on how

low

a price is charged for a product. Governments intend price floors to

protect suppliers

from conditions that could hurt businesses

P

Q

.

.

Price Ceiling

}

shortage

Price ceilings

are always below equilibrium

Represents the

m

aximum price

a

llowed

– this

helps

consumers

, but

c

reates a

shortage

P

Q

.

.

Price Floors

Price Floors

are always above equilibrium

Represents the

m

inimum price

a

llowed

– this

helps

p

roducers

, but

c

reates a

surplus

}

surplus

Rent Control and its effects

Rent control

is an example of a

price ceiling

The government lowers the price of rent to try to help consumers

Effects of rent control:

Shortage

of apartments available

Increase consumer surplus

for the few who are able to find apartments

Reduce producer surplus

of landlords who can’t afford to supply more apartments

Negatively affect other renters

who lose their apartments because landlords can’t afford to supply them anymore

Total surplus is reduced

since rent control prevents some mutually beneficial transactions from taking place (some consumers are willing to rent at higher prices, and suppliers are willing to supply rent at higher prices)

Disruptive effect on the allocation of apartments

, meaning landlords can choose their tenants rather than giving them to individuals who value them most highly (causes inefficiency)

In the short run

, both the supply and demand for housing may be

highly inelastic, but over time they become more elasticLandlords will cut back on maintenance costs

, allowing apartments to deteriorateLow prices will attract more residents to the city

, creating even more excess demand

In other words, price controls are

no

bueno

.



Taxes (yay.)

Who bears the burden of paying the tax?

Both consumers and suppliers share the cost of the tax

A tax creates a price wedge between the amount consumers pay and the amount suppliers receive

The effects of tax on consumer and producer surplus:

Prevents mutually beneficial transactions from taking place

This reduction in social welfare is called

deadweight loss

The money that the

gov

makes from taxes reduces total surplus by the same amount

the less elastic the demand/supply curves are:

the greater the share of the tax paid by buyers

the smaller the effect on equilibrium

the lower the deadweight loss

International Trade

When individuals or countries

specialize

in the activity they do the best, there are

gains from trade

Production Possibility Frontier (PPF)

A 

curve

 depicting all maximum

output possibilities

 for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently.

Absolute vs Comparative Advantage

This is so ridiculously easy that I’ll show you in class next time!