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Supply Restrictions, Tax, and Subsidy: 10 9 8 7 S P P A B D
Supply Restrictions, Tax, and Subsidy: 10 9 8 7 S P P A B D
Supply Restrictions, Tax, and Subsidy: 10 9 8 7 S P P A B D
Chia-Hui Chen
Lecture 17
Supply Restrictions, Tax, and Subsidy
Outline
1. Chap 9: Agricultural Price Support
2. Chap 9: Supply Restrictions
3. Chap 9: Tax and Subsidy
10
7 S
P
6 2
P A B D
5 1
P
3 E D
1
Q Q Q
0 2 1 3
0 1 2 3 4 5 6 7 8 9 10
Q
demand curve and the line of price P1 ; after the price support, it equals the
area between the demand curve and the line of price P2 , thus
The original producer surplus equals the area between the supply curve and the
line of price P1 ; after the price support, it equals the area between the supply
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
2 Supply Restrictions 2
2 Supply Restrictions
Government restricts quantity supplied to be less than Q1 (see Figure 2). The
10
7 S
P1
6
A B
P0
5
P
C
P2
4
3 D
1
Q Q0
0 1
0 2 4 6 8 10
Q
original consumer surplus equals the area between the demand curve and the
line of price P0 ; after the supply restriction, it equals the area between the
demand curve and the line of price P1 , thus
ΔCS = −(A + B).
The original producer surplus equals the area between the supply curve and the
line of price P0 ; after the supply restriction, it equals the area of the trapezoid,
with the supply curve, the line of price P1 , the line of quantity Q1 , and the price
axis as its sides, thus
ΔP S = A − C.
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
2.1 Zero Quota 3
DW L = −(B + C).
Example government measures include import quota and tariff, which benefit
domestic producers but hurt consumers.
10
8
S
7 D
6
P0
5
P
PW A B C
4
3
DD
2
1
Q Q Q
0 S 0 D
0 1 2 3 4 5 6 7 8 9 10
Q
between the domestic demand curve and the line of price PW ; if the quota is
zero, it equals the area between the domestic demand curve and the line of price
P0 , thus
ΔCS = −(A + B + C).
Without quota restriction, producer surplus equals the area between the domes
tic supply curve and the line of price PW ; if the quota is zero, it equals the area
between the domestic supply curve and the line of price P0 , thus
ΔP S = A.
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
2.3 Import Tariff 4
10
7
SD
5
P
P1
4
A B C D
PW
3 D
D
1
QS QS1 QD1 QD
0
0 2 4 6 8 10
Q
(QD1 ) and domestic supply (QS1 ) is k (see Figure 4). Likewise, the change of
consumer surplus
ΔCS = −(A + B + C + D);
and the change of domestic producer surplus
ΔP SD = A.
−(ΔCS + ΔP S) = B + C + D.
The foreign producer surplus increases by excess profits, which equal the area
of rectangular C
ΔP SF = C.
The total deadweight loss is
DW L = B + D.
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
3 Tax and Subsidy 5
10
SD
4 1
A B C D
PW
3 DD
QS QS1 QD1 Q
D
0
0 2 4 6 8 10
Q
ΔCS = −(A + B + C + D)
and
ΔP SD = A,
respectively. Foreign producers gain nothing, that is to say
ΔP SF = 0,
ΔG = C.
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].
3 Tax and Subsidy 6
Therefore, the price paid by buyers and the price received by producers always
have a difference of 1 (see Figure 6). Let PB be the buyer’s price and PS be the
seller’s price.
PD − PS = 1.
In figure 6, we put buyer’s price on the y axis. Therefore, with the tax, the
supply curve moves from S to S ′ . The equilibrium buyer’s price is PD , and
the equilibrium seller’s price is PS . Thus, the consumer surplus and producer
4.5
4 S’
buyer’s price
3.5
S
3
P
D A B
2.5
P
P0 D
C
2
P
S D
1.5
0.5
Q Q1
0
0
0 1 2 3 4 5 6 7 8 9 10
Q
Figure 6: Tax.
Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT
OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month
YYYY].