part 4 Flashcards
What are the assumptions for an efficient market?
- There are markets and market prices for every good
- Market is perfectly competitive
- Each individula utility and profit depend on solely on individual consumption decision,a dn production decision. (NO EXTERNALITY)
What happens when a price ceiling is above the equilibrium price?
Non binding, no effect on market outcomes
What causes the poor conditions in rent control properties wth a binding price ceiling?
poor quality of houses
poor Maintenance
If the benefit is capped at the amount, you have little incentive to spend more than you absolutely need to
cost is the amount you charge for rent
Explain black markets as a result of price ceiling
where goods are sold illegally
at prices above the legal ceiling,
and typically above
the original equilibrium price
AS THE PEOPLE WHO ARE LIKELY OT END UP WITH THE TICKET WITH THE HIGHEST WILLINGES AND ABILITY TO PAY
What is Deadweight loss?
Price floor: benefit that could have gone to someone without govt intervention
Explain what happens when a tax is imposed on buyers
raises buyers’ expenditure
Buyers will buy SAME AMOUNT OF PIZZA AT LOWER PRICE
to compensate for the tax hike.
Have to redice willingness and ability to pay
Now only willing to pay original price (??) to compensate for tax hike
original willingness and ability to pay does no tchange
Will shift demand curve DOWN by amount fof tax
What is incidence of tax or subsidy/
How the burden of tax is shared between buyers and sellers
who bears the greater burden of tax when supply more elastic than demand?
It’s easier for sellers than for buyers to leave the market, more than proportionate decrease in qs
So buyers bear most of the burden
of the tax.
as suppliers are more responsive
State whetehr these taxes are progressive or regressive in Singapore?
CONSUMPTION:
Income tax:
Property tax:
Capial gains tax:
Estate/ inheritance tax:
CONSUMPTION: regressive
Income tax: progressive
Property tax: progresive
Capial gains tax: progressive ta
Estate/ inheritance tax: progressive tax
Explain what causes the deadweight loss as a result of a tax
fall in total surplus that results from
a market distortion such as a tax.
The value of these units to buyers
is greater than
the cost of producing them;
the tax prevents
some mutually beneficial trades.
Explain how does price elastic supply affect tax burden of suppliers and DWL
The more elastic
the supply,
the easier it is for sellers
to leave the market when the tax lowers PS ,
the more Q falls below
the surplus-maximizing quantity,
and the greater the DWL.
How does a more price elastic demand curve affect DWL and the tax burden for buyers
The more elastic
the demand,
the easier it is for buyers
to leave the market when the tax raises PB ,
the more Q falls below
the surplus-maximizing quantity as Q falls by a greater extent,
and the greater the DWL
Why do you drive the wedge for subsidy from the right of equilibrium and why tax is on the left?
subsidy: result in increase in quantityt
tax: result in decrease in quantity
Explain the deadweight loss from the subsidy in general
BECAUSE OF SUBSIDY, UNITS BETWEEN QS AND QE IS SOLD
QS IS new equilibrium qe is origianl equilibrium
The valeu of units to buyers as shown by demnad curve is less than the cost of producing them as shown by supply curve
Results in wasteful trades
The value of these units to buyers
is less than
the cost of producing them;
the subsidy induces some wasteful trades
Give the supplier side explanation for the deadweight loss of the subsidy
Supply curve tells us cost of producing units
Demand curve tells us the buyer valuation of units
For these units, the seller cost exceeds buyer valuations
Because if there is a subsidy, it lowers producers true cost as it increase in willing to pay
Seller pays less out of pocket as govt pay some of the cost
True cost to society which is the cost to seller + cost to govt is the same a sbefore
