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Lecture_5_Government_Policy_2021

The document outlines exam preparation strategies for a course on Economics for Business Studies, emphasizing the importance of understanding concepts, completing problem sets, and summarizing topics. It discusses government policies affecting supply and demand, including price ceilings and floors, and the impact of taxes on market outcomes. Additionally, it highlights the effects of elasticity on tax incidence and the potential unintended consequences of government interventions in the market.

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markcheung04
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15 views

Lecture_5_Government_Policy_2021

The document outlines exam preparation strategies for a course on Economics for Business Studies, emphasizing the importance of understanding concepts, completing problem sets, and summarizing topics. It discusses government policies affecting supply and demand, including price ceilings and floors, and the impact of taxes on market outcomes. Additionally, it highlights the effects of elasticity on tax incidence and the potential unintended consequences of government interventions in the market.

Uploaded by

markcheung04
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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DSME 1030GI Economics For

Business Studies I

GOVERNMENT POLICY
Dr. Paul M. Kitney
Term 1, 2021-22
My Recommendation For Exam Prep

1. Make Sure You Understand Every Concept Including Every Example


(Do Again Yourself) Shown In Class. Read Text
2. Complete ALL Problem Sets. Make Sure You Understand Everything
3. Summarize Each Topic – Showed Example at the Beginning Of Last
2 Lectures – Personal Approach – You Should Do Yourself Now!
4. Keep Reviewing Summary Over and Over and Doing Problems Over
and Over Again
5. Take Exam…Good Luck! 

The Earlier You Complete 1-3, The More Time You Have To Review,
Practice & Thoroughly Prepare For the Exam!
Government Policy:
Applying Supply and Demand
• We Have Already Seen Government Policy In Anti-Price Gouging Laws
During Hurricanes Harvey and Irma Recently
• Disequilibrium – Excess Demand or Shortages
Govt. Policies May Alter Free Market Outcomes
• Price ceiling
• A legal maximum on the price at which a good can be sold
• E.g. Anti-Price Gouging laws (USA)
• E.g. Anti-Surge Pricing laws on Uber in India

• Price floor
• A legal minimum on the price at which a good can be sold
• Minimum wage laws in Hong Kong

• Taxes
• Government can impose a tax on buyers or sellers – specific
amount per unit
• E.g. Consumption Tax in India, VAT in UK
Hong Kong Minimum Wage- Is it Binding?

• Example of a Price Floor (“Floor” mean minimum and “Ceiling” means


maximum)
• Binding? Means “Does it affect the free market outcome?”
• In our example, whether the HK minimum wage is binding or not ,
depends on which labor market segment – Investment Bankers versus
Junior Shop Assistants
Hong Kong Minimum Wage- Is it Binding?

a) Non-Binding b) Binding

• Case a) Does not affect market outcome – Not binding


• Case b) Minimum wage leads to labor surplus. In other words,
unemployment
Price Ceiling on Uber Surge Pricing In India

• May 2016 Forbes Article – Indian Govt. Policy to Protect Street Taxis From
Uber – Fairness Argument (Not Efficiency)
• Free market equilibrium (Q1,P1). Binding Price Ceiling leads to Shortage
(excess demand) = Q0 - Q2
Uber Price Ceilings:
Long-Run Versus Short-Run Shortages
Short-run Long-run

• In the Long-run Price Elasticity of Supply and Demand are Higher


• More or less Uber licensed Cars in Long Run affects Supply. On the
demand side, customers can substitute to driving own car or other
transport options
• Higher Elasticity in the Long-run Implies Larger Long-run Shortages.
What Do We Think Of Price Controls?

• Governments – sometimes with good intentions – other times will


political motivations, use price controls to try to achieve a better
outcome for society than the market
• They may very good intentions such as trying to help the poor (minimum
wages, anti-price gouging) BUT may hurt those people they are trying to
help (unemployment, shortages of necessities).
• The Free Market allocates resources EFFICIENTLY through the Invisible
Hand. Just Ask Adam Smith…
Government Taxes
• The government levies taxes on many goods & services to
raise revenue to pay for national defense, public schools,
etc. The government can make buyers or sellers pay the tax.

• Tax incidence - Manner in which the burden of a tax is shared among


participants in a market

• The tax can be a percentage of the good’s price, or a specific amount for
each unit sold.

• For simplicity, we analyze per-unit taxes only.


Taxing Sellers

How do taxes on sellers affect market outcomes?


• Immediate impact on sellers: shift in supply
• Supply curve shifts left
• Higher equilibrium price
• Lower equilibrium quantity
• The tax reduces the size of the market
Taxing Sellers – My Ice Cream Business is Taxed

• Government imposes a $0.50 tax on ice cream. Boooooo!


• Initial Equilibrium Price is $3.00 and quantity sold 100.
• Supply Curve Shifts to the Left due to the tax
• My Customers (buyers) new equilibrium price is $3.30. They pay more, so are
worse off. Equilibrium quantity falls from 100 to 90.
• Me, the ice cream maker (seller) receives $3.30 – Tax = $2.80, so
• I receive a lower price for my ice cream, and sell 10 fewer, so I am worse off
Taxing Buyers

How taxes on buyers affect market outcomes


• Initial impact on the demand
• Demand curve shifts left
• Lower equilibrium price
• Lower equilibrium quantity
• The tax reduces the size of the market
Taxing Buyers – My Ice Cream Customers

• Government imposes a $0.50 tax consumption tax


• Initial Equilibrium Price is $3.00 and quantity sold 100.
• Demand Curve Shifts to the Left due to the tax
• The new equilibrium price is $2.80. Me, the sellers gets $2.80 for my ice
cream, less than before. Equilibrium quantity falls to 90, so I sell less.
• My customers (buyers) pay $3.30 = $2.80 + $0.50 so they pay more
• than before. Everyone is worse off (Except the Government)
Effects of Taxes on Buyers Vs Sellers

• Taxes levied on sellers and taxes levied on buyers are equivalent


• Wedge between the price that buyers pay and the price that sellers
receive
• The same, regardless of whether the tax is levied on buyers or sellers
• Shifts the relative position of the supply and demand curves
• Buyers and sellers share the tax burden
Elasticity & Tax Incidence:
Supply More Elastic Than Demand
Elasticity & Tax Incidence:
Demand More Elastic Than Supply
Elasticity and Tax Incidence Summary

• Tax burden - Falls more heavily on the side of the market that is less
elastic
• Small elasticity of demand - Buyers do not have good alternatives to
consuming this good
• Small elasticity of supply - Sellers do not have good alternatives to
producing this good

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