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CH2C: Resource allocation: Applications of price theory, incidence means…

- - - - a price ceiling is the maximum legal market price set and allowed by the govenment (below the market equilibirum price)
    - - Affordability and fairness
        prevent exploitation by suppliers who may charge high prices during times of shortage
      - anti-inflationary policy
        prevent continuous increase in prices of many products which could be detrimental to economic growth people's standard of living
    - - Aim: the goods and services will be made more affordable to those previously could not afford them
        
        for consumers: legislated price set below Po - lower prices than free-market price: gain in consumer surplus
        
        for producers: Qty transacted decrease, Price decreases. loss in producer surplus
        
        However, at Pmax, there would be a shortage that exists
        result in an inefficient allocation of resources - deadweight loss
        
        Problems: the emergence of the black market (where goods are sold illegally at market prices above the legislated maximum market prices)
        The government's objective is not met
        
        e.g. They buy up all the available products
        have access to potential consumers who are unable to purchas eenough of the goods and services at ceiling price but are willing to pay ro the goods and services at higher price to obtain them
        black market - sell 0Qs of the goods and services to consumers at the maximum price that consumers are willing and able to pay
        
        deadweight loss - society is worse off welfare loss
        
        allocation of goods and services on 'first-come, first-served basis' - queues, extra waiting time
        
        those who need it most may not be amongst the first in the line
        
        firms deciding which customers should be allowed to buy
        
        rationing through the issue of coupons which can also be administratively expensive
        
        producers have less incentive to invest in quality control and innovation because of the loer profitability of providing the goods and services
  - - - effect of floor
        
        Aim: protect producers' income; better standard of life
        
        for consumers: legislated P min is set above Po, need to pay more
        
        for workers: higher wage, guaranteed standard of life
        
        for producers: higher revenue (possibly less quantity - loss consumers)
        
        However, surplus will result in an inefficient allocation of resources since total surplus or societal welfare is reduced as deadweight loss
        
        problem:
        
        firms have the incentive to evade the price floor and sell the surplus below the minimum legislated prices (especially true when the PED of the product is high so they can increase TR by lowering the price)
        
        revenue of law-abiding producers may fall
        
        artificially high prices may cushion inefficiency.
        firms may feel less needed to find more efficient methods of production and to cut their cost if their profits are being protected by the legislated minimum market price
        
        discourage the firms from producing alternative goods which they could produce more efficiently
        
        what can the govenment do?
        
        buy the surplus and store it, destroy it or sell it aboard in other markets.
        (however, if the product is perishable, extra cost of storage may be needed. sell it aboard will increase the world supply hence decrease the world price and increase surplus)
        
        supply can be artificially lowered by restricting producers to particular quotas - lower the quantity transacted, cause the market price to increase.
        loss of consumption, lower the economic welfare for all
        
        demand could be raised by advertising. finding alternative uses of the goods and reducing consumption of substitutes.
    - - a price floor is the minimum legal market price set and allowed by the govenment
    - - to protect producer's income:
        minimum prices would prevent producers' income from falling during periods of low demand.
        the government have to buy up the surpluses in the market
      - to create surplus, which can be stored in preparation for future shortages
      - minimum wage legislation can be used to prevent wage rates form falling below a certain level, hence ensuring an acceptable level of living standards
- - - - taxes on income and wealth. paid directly to the tax authorities.
    - - specific tax
        fixed amount of tax is charged per unit sold. tax oer unit of the good is the same regardless of the price of the good
        upward shift of the supply curve
      - ad valorem tax
        good or service is taxed a certain percentage based on the value of the product (e.g. 7% tax). The higher the price, the higher the tax per unit of the good
        the tangent of the supply curve will increase while the origin remains the same
  - - - taxes on expenditure. they are paid to the tax authorities, not by the consumer, but indirectly by the suppliers of the goods or services.
    - - 以左图距离。假如每单元的税是2$，原价（market equilibrium的时候）为3$，加了税过后新的equilibrium价格是4$（因为supply curve往上涨了嘛）。原本consumer需要付3$，producer可以收到3$。但是有了税收以后，consumer必须付4$，所以consumer分担了这1$的税收。producer赚了4$，但是2$拿去交税了，所以和最开始的3$比起来还是少赚了1$。这1$就是producer所分担的tax。
      - government receives tax revenue.
        Societal welfare loss can be illustrated by deadweight loss area.
      - The demand is relatively more price elastic than supply
        
        The supply is relatively more price inelastic than demand
        
        consumer burden ＜ producer burden
        
        when the demand is relatively more price inelastic than supply
        
        when the supply is relatively more price elastic than demand
        
        consumer burden ＞ producer burden
- - - - subsidies on expenditure, paid indirectly to the suppliers of the goods or services and consumers benefit through reduced price.
    - - 右图中两个长方形加在一起的面积就是政府的expenditure。
        deadweight loss是右边的小三角形。
      - 以右图为例，假如政府给了一个2$的subsidy，这个东西的价格就从原来的equilibrium（3$）下降到了2$。所以对于consumer来说就要少付1$。producer收到了一个2$的subsidy，他们原本收入是3$，现在变成了2+2=4$。所以他们也享受了1$的subsidy。
      - demand is relatively more inelastic than supply
        
        supply is relatively more inelastic than demand
        
        demand is relatively more elastic than supply
        
        supply is relatively more inelastic than demand
        
        consumer share ＜ producer share
  - - - subsidies on income and wealth. paid directly to household.
        supply curve shift downwards