AEECO - Market Efficiency
# Surplus
# Consumer Surplus
Difference between what a consumer is prepared to pay and what they actually pay in the market.
# Marginal cost
The extra opportunity cost of
# Producer Surplus
Difference between what a producer is willing to receive and what they actually receive in a market.
# Marginal cost
The extra opportunity cost of producing one more unit of a good or service
# Total Surplus
Total surplus = CS + PS
It is a measure of the net benefits to society from the production consumption of the good.
# Deadweight Loss
Loss in total surplus that is avoidable.
# Efficiency
# Price Ceiling
Is the highest price that a producer can charge on a good.
- It is usually below the equilibrium price
- Intended to keep prices affordable for majority of the population
# Impacts
- Need for rationing process to regulate demand
- Could lead to black markets
# Price Floor
Is the minimum price that a producer can charge on a good
- It is usually above the equilibrium price
- Designed to ensure that there is a minimum income received by producers
# Impacts
- Informal illegal markets could result
# Explanation
- Original price and quantity
- Implement price floor/ceiling (say above or below equilibrium)
- New price and quantity
- Quantity demanded/supplied comparison - Shortage/Surplus
- Consumer, producer surplus + dead weight loss (use letters, A, B, C, etc)
- Loss in efficiency
# Price Ceiling Explanation
The original
# Taxes
# Types of Tax
# Direct Tax
- E.g. Income tax
# Indirect Tax
- Consumers do not pay the tax directly, but are affected through changes in the price of the good or service
# Specific Tax
- The tax is a fixed amount or is a set sum of money per unit
# Why?
- Can aid in the redistribution of income
- To correct externalities
- To earn revenue
# Impacts
- Reduces quantity while increasing price
- Tax incidence depends on the elasticity of the good/service
- Creates a dead weight loss
# Explanation
- Original P/Qty
- Implement gov policy
- New Price/Quantity
- Tax revenue
- CS, PS, TS, DWL
- Conclusion on efficiency
# Subsidies
A payment by the government to a firm to reduce production costs and increase output.
- Encourages production of goods with positive externalities
- Allows the producer to export more
- Aids the expansion of the firm
# Impacts
- DWL as part of government expenditure on the subsidy is not translated into either consumer or producer surplus
# Notes from Videos
# Subsidy
A subsidy is a payment from the government to producers for each unit produced
# Effects of the subsidy
# On Consumer Surplus:
# On Producer Surplus:
On Tax Payers:
- Total cost of the subsidy exceeds the total benefit in subsidy $\rightarrow$ DWL On Total Welfare:
# Tax
Lots of math that we don’t need to do