Interfering in the Market

What are the consequences of interfering in the operations of a market

Government in Marketplace violation of Adam Smith's Invisible
HandTheory

why are taxesbad Why don'tfeconomists like taxationincentivized

rich are taxedhigher dis toearn
Does it matter who is taxed NO more

Why are American lawyers the highest paid in theworld

Taxes
Restriction on Price
Restriction on Quantity

taxes
suppose a tax is imposed on energy drinks
Gov likes to tax alcohol 1 energy drinks
Market Model
Equilibrium price 100
Where is Q p s t there is a 50
gap between what buyer
pays and seller receives
As a result what buyer pay t sellers receive Different

prices graph
 15 Amt of tax sellerhas to bear Both bearthe burden
35 Buyer's share

Tax incidence refers to who bears the burden of the tax

Who is beingtaxed
Thetax incidence is independent of the target of the tax

Taxing the Producer

t taxes on producer Acost of production bytheamt of thetax
level of supplybythe ant of the tax supply curve
goes inward upward or to the left
They reoptimize to see how muchthey can pass off to the
customer

where the new equilibrium is what the customer pays

Pay 50 out of 135 iReceive 85
Tax burden from the original scenario the same

Taxing the customer

to payt.by the amt of the tax
effective willingness
Demand curve shifts downward inward to the left

Reoptimiu how much are the sellers willing to receive

New equilibrium what the seller receives
 Tax incidence same as before

Target of tax independent of tax incidence

Nhat Determines the incidence of a tax

Supply curve Steeper

pivoting about a point
Demand curve flatter
FDA

when the demand curve gets fatter and the supply

curve gets sleeper then the buyer's burden of the tax will
decrease and the seller's burden will increase
The opposite is true
When the demand curve
gets sleeper and the supply curve
gets flatter then the buyer's burden of the tax will increase
and the seller's burden will decrease

The tax incidence is determined by the relative slopes

of the demand and supply curve how steep or flat the
curves are relative to each other

Economists don't like taxes but not for the same reason we do

the WELFARE of taxation

Consider

KNOW DEFINITION OF CONSUMER SURPLUS 1 PRODUCER SURPLUS

 consumer surplus Price A Demand Curve B
Producer surplus Price Supply Curve A

Consumer Surplus decreases

Producer surplus i
decreases

Vertical Hedge X Quantity Government Revenue

Government Revenue Area of Rectangle

Length Qty
Width Price

Loss in welfare Dead weight loss

Dead weight loss is a lossin welfare by one economic agent

that is not matched by an equal gain in welfare by another
economic agent
pm supply
W
pead
CS

pi
Government
Revenue 1
I
l
PS
l Demand
I
In Real Life
In remittingtaxes
Property Taxes 15000

pay lose 15000

Government
gain 15000
BUT
you lose productive time assuming you left
Your employer lose productive time work to
go

Restrictions on Price
there are two types of price restrictions
Price Floor
price ceiling

price ceiling
maximumlupper limit above which prices cannot rise
In order for a price ceiling to be effective it must be established
below equilibrium price

Demand supply SHORTAGE

To eliminate shortage Prices rise
BUT it can't pass the ceiling
so the ceiling is effective
Price ceiling keeps prices
artificially low

Price
ceiling legally bounded
raise above i can be imprisoned

IRL
Oil crises US 1973
World Oil Crisis 197Os
Oil prices x 3 tripled
Everything's price
Inflation
President Nixon price ceiling on crude oil t gasoline
Operate above that Imprisonment
Fraud
Prices are artificially low
Not signalling to consumers that there is a
shortage
Will not cut back on supply until the supply is depleted
MAY cause stealing and murder

Foreign Exchange Venezuela 2010

Venema has a lot of problems They should just shut
down the entire economy

klh.cn hard times hit the entire economy hinges on oil

Oil prices low i Hit entire economy
 Use a lot of oil To raise price of oil
Started to run out of oil prices double triple
Price of Everything 9
People run out of Fx dollar Exchange Rate A
JMD lose value against USD Exchange Rate A
price ceiling on Fx
when prices are are artificially low it doesnot
signal to the consumers that the reserve is low
Run out of Fx Riot kill each other

food Zimbabwe 2011

Zimbabwe Price Controls Cause Chaos New York Times
July 03,2007
Had hyper inflation out of control

Had debt i couldn't pay

print
money
i
satisfy debt inflation
WRONG DIRECTION

Highest Note US 100

JA 5000
Anytime the government decides to print 8110000 notes

w hand not function by printing Do other

things
money

Dollar lost value

Inflation A
 Dollar lost more value
Price ceiling i
Artificially low prices
inflation Skyrocketing prices
fragoneynaifts

gnal to consumers to cut

back
Supermarket line longdont
get through for days food
ran out
Someone comes out withfood i Rob Him
Beat Him
Kill Him
Large Scale Riots i Had to call in military backup to
control the crowd

Entire topic deals withthe concept Prices Reflect Relative

scarcity

Price movements are irrepressible

Consequence The market tries to reassert itself

Illegal Market pay any amount of money to get the item whichis
short Rather
paymore money than wait

Bundling i if there is a price ceiling on an item

they putthat good
together with an unrestricted priced itemand overprice the
item which doesn't have a ceiling
 QualityReduction Holes in bread
Air in bagclaysDoritos etc
Reduce quality because people can't afford the
item
Eg Purchase onesqueeze of toothpaste
5 Cut
up cake soap
cs Bag out goods
Do not buy things you can't afford

Price floors
a lower limit1minimum below which prices cannot fall
for a pricefloor to beeffective it has to be established above
equilibrium price
Prices raise incentivize suppliers
SURPLUS
discourages consumers
Prices are forced to be artificially high

USA Agricultural Price Support

Agricultural Scheme JA Small farmers protection

eg in grain
institute price floor
surplus of grains on market
At a high price suppliers can sell at a higher price
more profit BUT high prices reduces demand lesspeople

buy Get higher price on what they're able to sell

 What
they
can't sell Government
buys it back at the higher
price
Farmers happy
Government Stock piles of grain
welfare simulator
Distributes
grains free of costto shelters or at
a subsidized cost
This is
why they have so many welfare programs Theycan
sustain because of the revenue they make
Jamaica's GDP not even a quarter of US
we can't do this
we have protection for farmers but
not like the US

Consequence the Market tries to reassert itself

InformalMarket i
All illegal markets are informal but not
all informal markets are illegal Don't do
proper recording or pay taxesThis is not

illegal UNLEI the commoditiessold are

illegal

Giveaways Back to school promo not actually giveaways

Things are spoiling Reduce Price
Give it away
 ynw un s g ng

Quality increase Maynot be productbut it may bethe customer

service
ambiance service
Eg Restaurants
willingto pay high price
against the price floor but it
Not guarantees
the price floor

Welfare costs1Effects of Price controls or Restrictions in the Market

Lose Welfare
Max welfare i Equilibrium Q t Equilibrium P

Ceiling9 but Demand curve CS9

What is gained is
way morethan what is lost
green blue
CSP PSA

Redistributes welfare from Producer to consumer

by 1
Lost Deadweightloss
by another
economic
agent not gained

Price Floor CS price B

CS B
PS 9
Redistribute welfare from consumer to oroducer
Both Price Floors 1 Price ceilings lead to Dead Height Loss

wage takes placetoday Jan 2014

New minimum Observer
price Floor

1
For minimum wage to be effective it must be higher than
what producers are willing to pay

Gap between Demand 1 Supply Unemployment

F Min Wage Larger Gap BUnemployment

Sell Yourself i Resume

professional Prostitution for employment to
the highest bidder highest payer

Persons start cutting off workers from the top

i have
Management to pay them highwage
Min Level Work the hardest

min Wage Onlybeneficial to those who are already employed

Price controlsalso interfere with the role of prices in signalling to

consumers and producers how best to allocate scarce resources
Restriction on Quantity
There are two types of Quantity restriction
Demand restriction

supply restriction

Supply restrictions
Must be restricted to the left of the equilibrium qtybelow
vertical lineI wedge new supply curve kinked
Old Supply curve NULL and VOID upwardsscopingtothat
point
pa QR

nshorifage s

g
D
After this point pack
w w Q
better
Off
worse
off up shop and go
Demand Same

Supply Reduced

Gap Shortage Demand Supply

Prices P to equate Det SC Price

Market is closed off vertical restriction

Who gets to decide who produces
The Government This leads to problems

New York taxis parked waiting for people

taxi price too high
people take train bus
fixed Qty
taxi medallion trade for 1m US
Pass cost off to consumers
The minute youstart to talk charge
Drive charge
Hoa
anagoge

Meter keeps running until you come out

5 min drive 2000 t TAISHO US

Fixed Amt no one else can enter unless someone trades which
is a higher price

US lawyers Barriers to entry are high

lawyers artificially low
Gvery hard to get into possession of law
unearned premium on
legal wages
Salary America 2000 191 000
 Australia 90000
Canada 2002 60000
Litigation HIGH lawsuits
jaywalking

lots of legal cases

few lawyers
Pay VERY high price
Other countries
oversupply of lawyers
Paralegal no bar 40000
Lawyer no reputation bar 60000 80000
bar reputationafter 10yrs money

Demand Restriction
Quantity restriction
downwards
sloping until it meets vertical point
SURPLUS Prices fall to eliminate this

p n DemandyQR
supply

l
I
I
un Q
Beller worse
off off
 Nwc rations water

Problems with All Market Interferences

Deadweight Loss

Enforcement costs to protect against high low price

detect when someone defies law
it costs to enforce activities

Favouritism and Corruption Govt decides who getstaxed

12richest families ihelp out JA
1 wisynco distribute foam boxes
straws subsidized
prices or free to schools
Vested interest in company as
a Worker Protect them
govt

Misallocation of Resources either

artificially highflow
consumers aren't
signalled how
to allocate resources

All of these lead to decrease in welfare

Better off the cost of worse off persons

Takeaways
The person Ifirm who pays the tax is not necessarily the
one who bears the burden

Market interferences tend to create deadweight losses