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Microeconomics: Efficiency and Market Interventions

May 5, 2025

Microeconomics: Economic Efficiency, Government Price Setting, and Taxes

Chapter Outline

  • 4.1 Consumer Surplus and Producer Surplus
  • 4.2 The Efficiency of Competitive Markets
  • 4.3 Government Intervention in the Market: Price Floors and Price Ceilings
  • 4.4 The Economic Effect of Taxes

Key Concepts

Consumer Surplus and Producer Surplus

  • Consumer Surplus: Difference between the highest price a consumer is willing to pay and the actual price paid.
  • Producer Surplus: Difference between the lowest price a firm would accept and the price it actually receives.
  • Surplus: Refers to the benefit derived from market transactions.

Examples

  • Chai Tea Market:
    • Example illustrating consumer surplus, where price changes affect the consumer benefits.
    • Graphical representation of consumer surplus as the area below the demand curve and above the price.
  • Uber Services:
    • Analysis of consumer surplus derived from Uber rides using the demand curve and price data.

Efficiency of Competitive Markets

  • Economic Efficiency:
    • Market is efficient if all trades occur where marginal benefit exceeds marginal cost.
    • Efficiency also implies maximizing the sum of consumer surplus and producer surplus (economic surplus).
  • Competitive Equilibrium:
    • Occurs where marginal benefit equals marginal cost; ensures maximum economic efficiency and no deadweight loss.

Government Intervention: Price Floors and Ceilings

  • Price Ceiling: Maximum price sellers can charge; may lead to shortages.
  • Price Floor: Minimum price sellers can receive; may lead to surpluses.
  • Effects:
    • Rent control leads to apartment shortages; minimum wage affects employment levels.
    • Price controls can create deadweight loss, reducing economic efficiency.

Real-World Implications

  • Labor Markets:
    • Minimum wage argues both for raising low-skilled worker incomes and causing employment decreases.
  • Rent Control:
    • Deadweight loss from reduced rents leads to shortages and potential black markets.

Economic Effect of Taxes

  • Per-Unit Taxes:
    • Assessed as a specific amount per unit sold, such as excise taxes on gasoline.
    • Taxes shift supply curves up, changing equilibrium prices and quantities.
  • Tax Incidence:
    • Describes who bears the burden of a tax; determined by demand and supply curve slopes.
    • Legal obligation to pay tax does not necessarily reflect who bears its burden.

Figures and Applications

  • Chai Tea Market & Uber Analysis: Demonstrate consumer surplus calculations.
  • Competitive Equilibrium: Illustrate economic surplus maximization.
  • Price Floors & Ceilings: Show how impositions affect market equilibrium and generate deadweight loss.
  • Tax Effects:
    • Cigarette market example shows tax shifting supply curves and affecting equilibrium.
    • Gasoline market example demonstrates tax incidence between buyers and sellers.

Concluding Notes

  • Market efficiency and economic surplus are maximized at competitive equilibrium.
  • Government interventions such as price controls and taxes impact economic efficiency and surplus distribution.
  • Understanding tax incidence is critical for evaluating economic policies and their real-world implications.

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