Chapter 10 - Competitive markets: Applications. This chapter presents the following content: motivation - agricultural price supports, deadweight loss, government intervention – Who wins and who loses? Examples of various government polices. | 1 Competitive Markets: Applications Chapter 10 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Ten Overview Motivation: Agricultural Price Supports Deadweight Loss A Perfectly Competitive Market Without Intervention Maximizes Total Surplus" Government Intervention – Who Wins and Who Loses? Examples of Various Government Polices Excise Taxes Price Ceilings and Floors Production Quotas Import Tariffs Conclusions Chapter Ten Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Ten Definition: Economic Efficiency means that the total surplus is maximized. "Every consumer who is willing to pay more than the opportunity cost of the resources needed to produce extra output is able to buy; every consumer who is not willing to pay the opportunity cost of the extra output does not buy.“ "All gains from trade (between buyers and suppliers) are exhausted at the efficient point." The perfectly competitive equilibrium attains economic efficiency. Economic Efficiency Note: Copyright (c)2014 . | 1 Competitive Markets: Applications Chapter 10 Copyright (c)2014 John Wiley & Sons, Inc. 1 2 Chapter Ten Overview Motivation: Agricultural Price Supports Deadweight Loss A Perfectly Competitive Market Without Intervention Maximizes Total Surplus" Government Intervention – Who Wins and Who Loses? Examples of Various Government Polices Excise Taxes Price Ceilings and Floors Production Quotas Import Tariffs Conclusions Chapter Ten Copyright (c)2014 John Wiley & Sons, Inc. 3 Chapter Ten Definition: Economic Efficiency means that the total surplus is maximized. "Every consumer who is willing to pay more than the opportunity cost of the resources needed to produce extra output is able to buy; every consumer who is not willing to pay the opportunity cost of the extra output does not buy.“ "All gains from trade (between buyers and suppliers) are exhausted at the efficient point." The perfectly competitive equilibrium attains economic efficiency. Economic Efficiency Note: Copyright (c)2014 John Wiley & Sons, Inc. 4 Demand Supply Q P Q* P* A B C D Q1 Pd Ps Chapter Ten Surplus Maximization in Competitive Equilibrium F G E Copyright (c)2014 John Wiley & Sons, Inc. 5 Chapter Ten At the Perfectly Competitive Equilibrium, (Q*,P*), Total Surplus is maximized. Consumer's Surplus at (Q*,P*): ABC Producer's Surplus at (Q*,P*) : DBC Total Surplus at (Q*,P*): ADC Surplus Maximization in Competitive Equilibrium Copyright (c)2014 John Wiley & Sons, Inc. 6 Chapter Ten Deadweight Loss Definition: A deadweight loss is a reduction in net economic benefits resulting from an inefficient allocation of resources. Consumer's Surplus at (Q1,Pd): AEF Producer's Surplus at (Q1,Pd) : EFGD Total Surplus at (Q1,Pd): AFGD Deadweight Loss at (Q1,Pd): AFC Copyright (c)2014 John Wiley & Sons, Inc. 7 Intervention Type Effect on (domestic) quantity traded Effect on (domestic) Consumer Surplus Effect on (domestic) Producer Surplus Effect on (domestic) Government Budget Is a (domestic) Deadweight Loss created?
