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ITE lecture:government intervention, Market structure and monopoly -…
ITE lecture:government intervention
Price ceiling/floor
price ceiling: a maximum allowable price, specified by law
purpose: fairness, to allow customers to purchase goods at affordable prices
2 different situation
price ceiling< market equilibrium price
Qs<Qd, result in shortage
solution: adopt a system of rationing:coupons; encourage supply:e.g. gov.direct production, subsidy/tax relief; reduce demand:more sustitutes
price ceiling> market equilibrium price
has no effect because price ceiling will decrease until equilibrium price is reached
side effects
underground markets arise ,long queues
reduce incentives to invest and supply
inefficient allocation of goods(shortage)
surplus losses(welfare economics )
price floor: a minimum price specified by law
purpose:protect producers income(farmers);create a surplus; reduce poverty and inequality; encourage investment in new technology
2 different situation
when price floor>market equilibrium price
Qs>Qd, result in surplus
solution: gov. buy & store it, or sell abroad; restrict supply(by quotas); raise demand(advertisement...)
price floor< equilibrium price
no effect
side effect
protect
inefficient producers
(production cost os relative higher than others)
inefficient allocation of resource
loss of welfare(dead weight lost)
price subsidy/taxtation
subsidy: a per-unit subsidy is an amount of money that the government pays to either producers or consumers for each unit of goods that is bought and sold
different type:cash subsidy(coupons\grants);tax concessions; interest rate that the market rate; government procurement(pay more tahn market price)
purpose: encourage consumption and production of goods/ services that have private benefit but also benefit a third party; encourage consumption of merit goods\vitally or strategically important goods; assist low-income consumers
side effect: inefficiency
taxtation
purpose: redistribution of income; raise revenue to finance public goods and services; deter consumption of demerit goods(tobacco); internalise costs of negative externality(pollution)
type
direct tax: paid directly to the government
indirect tax: usually via middle person(such as sellers)
side effect: dead weight loss(弹性越大，dead weight loss 越多，buyers share(tax burden 越多))
Market structure and monopoly
imperfect competition
imperfect competitive firms have some ability to set their own price(partly price steers)
long-run economic profit possible
reduce economic surplus
3 types
monopoly(垄断)： has only one seller, no close substitutes
monopolistic competition: has many firms produce slightly differentiated product that are reasonably close substitutes
Oligopoly: has a small number of large firms producing products that are close substitutes
difference with perfect competition:
Market power
def: is the firm's ability to set price of firm's production
sources of market power
exclusive control over important inputs
patents and copy rights
government licenses or franchises
economies of scale
Network economies
Monopoly
profit maximisation: MC=MR, P>MC
MR=P+Q
dP/dQ=P+dP/P
*/
dQ/Q=P+1/Ed(elasticity of demand)
MR&demand in monopoly
has the same intercept as the straight—line demand curve
MR curve has twice the slope of demand curve
MR curve lies below the demand curve
price choosing:Q升高时，revenue会出现两个变化
由于数量增加而多卖的钱
由于数量增加而导致的商品price下降
has no supply curve
social cost
Price discrimination
def: charging different buyers different price for essentially same good or service
different form
first degree
(Perfect discrimination)
: charge each buyer
the reservation price
for each unit of product
second degree:change consumers with different prices according to
the quantity they buy
Third degree
(hurdle method)
:charge different price for separate groups