Price floor graph
- Quantity demanded decrease (from Q* to Q1)
- Quantity supplied rises from Q* to Q2
- Surplus (Excess of supply) (Q2-Q1)
- New equilibrium at Q1, PS
- Reduces the quantity demanded below market equilibrium: deadweight loss
Consequences of price floor
- Collective welfare loss
- Waste of resources
- Gov have to buy unwanted surpluses (Q2-Q1)
- Inefficient allocation of sales among sellers:
- Misallocate sales by: Allowing high-cost firms to operate and preventing low-cost firms from entering the industry
- Inefficiently high quality:
- Encourage sellers to offer good inefficiently high quality that is higher than buyers are willing to pay for
Quota
- Quantity exchanged decrease (Q* to Q1)
- Welfare loss
Why do producers buy quotas?
- A quantity control together with a price floor enables the holder of a quota to make excess profit (economic rent)
- Market value of a quota is related to the size of the rent that it provides
o By purchasing quota, the producer buys the right to the rent for the entire duration of the quota.
o Will sell for a price=PV of all future rents the quota will yield
Tax
Shift supply curve to the left.
- Leads to a production decrease
- Decrease welfare
Price received and paid with a tax
Shift of Supply curve to the left:
- Price paid = new intersection
- Price received = new intersection, then go down to previous supply curve
Shift of Demand curve down:
- Price paid = new intersection, then go up or down to previous demand curve
- Price received = new intersection
Subsidy
Shift Demand curve up of Supply curve down
- Increase in production
- Decrease welfare
Price received and price paid subsidy
Shift demand curve up:
- Price received = new intersection
- Price paid = new intersection and go down to previous demand
Shift supply curve down:
- Price paid = new intersection
- Price received = new intersection and go up to previous supply curve
