Chapter 1,Slide 1,Topics to be Discussed,Evaluating the Gains and Losses from Government Policies-Consumer and Producer Surplus The Efficiency of a Competitive Market Minimum Prices,Chapter 1,Slide 2,Topics to be Discussed,Price Supports and Production Quotas Import Quotas and Tariffs The Impact of a Tax or Subsidy,Chapter 1,Slide 3,Evaluating the Gains and Losses fromGovernment Policies-Consumer and Producer Surplus,Review Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good. Producer surplus is the total benefit or revenue that producers receive beyond what it cost to produce a good.,Consumer and Producer Surplus,Quantity,0,Price,Chapter 1,Slide 5,To determine the welfare effect of a governmental policy we can measure the gain or loss in consumer and producer surplus. Welfare Effects Gains and losses caused by government intervention in the market.,Evaluating the Gains and Losses fromGovernment Policies-Consumer and Producer Surplus,Chapter 1,Slide 6,Change in Consumer andProducer Surplus from Price Controls,Quantity,Price,Chapter 1,Slide 7,Observations: The total loss is equal to area B + C. The total change in surplus = (A - B) + (-A - C) = -B - C The deadweight loss is the inefficiency of the price controls or the loss of the producer surplus exceeds the gain from consumer surplus.,Change in Consumer andProducer Surplus from Price Controls,Chapter 1,Slide 8,Observation Consumers can experience a net loss in consumer surplus when the demand is sufficiently inelastic,Change in Consumer andProducer Surplus from Price Controls,Chapter 1,Slide 9,Example,The demand for milk in the United States is given by and the U.S. supply of milk is , where Q is measured in billions of pounds per year, and P is measured in dollars per pound. Calculate the consumer surplus and producer surplus at the equilibrium price.,Chapter 1,Slide 10,Effect of Price ControlsWhen Demand Is Inelastic,Quantity,Price,Chapter 1,Slide 11,Price Controls and Natural Gas Shortages,1975 Price controls created a shortage of natural gas. What was the deadweight loss?,Chapter 1,Slide 12,Supply: QS = 14 + 2PG + 0.25PO Quantity supplied in trillion cubic feet (Tcf) Demand: QD = -5PG + 3.75PO Quantity demanded (Tcf) PG = price of natural gas in $/mcf and PO = price of oil in $/b.,Price Controls and Natural Gas Shortages,Data for 1975,Chapter 1,Slide 13,PO = $8/b Equilibrium PG = $2/mcf and Q = 20 Tcf Price ceiling set at $1 This information can be seen graphically:,Price Controls and Natural Gas Shortages,Data for 1975,Chapter 1,Slide 14,Quantity (Tcf),0,Price ($/mcf),5,10,15,20,25,30,Price Controls and Natural Gas Shortages,Chapter 1,Slide 15,Measuring the Impact of Price Controls 1 Tcf = 1 billion mcf If QD = 18, then P = $2.40 18 = -5PG + 3.75(8) A = (18 billion mcf) x ($1/mcf) = $18 billion B = (1/2) x (2 b. mcf) x ($0.40/mcf) = $0.4 billion C = (1/2) x (2 b. mcf) x ($1/mcf) = $1 billion,Price Controls and Natural Gas Shortages,Chapter 1,Slide 16,Measuring the Impact of Price Controls 1975 Change in consumer surplus = A - B = 18 - 0.04 = $17.6 billion Change in producer surplus = -A - C = -18-1 = -$19.0 billion,Price Controls and Natural Gas Shortages,Chapter 1,Slide 17,Measuring the Impact of Price Controls 1975 dollars, deadweight loss = -B - C = -0.4 - 1 = -$1.4 billion In 2000 dollars, the deadweight loss is more than $4 billion per year.,Price Controls and Natural Gas Shortages,Chapter 1,Slide 18,The Efficiency ofa Competitive Market,When do competitive markets generate an inefficient allocation of resources or market failure? 1) Externalities Costs or benefits that do not show up as part of the market price (e.g. pollution),Chapter 1,Slide 19,The Efficiency ofa Competitive Market,When do competitive markets generate an inefficient allocation of resources or market failure? 2)Lack of Information Imperfect information prevents consumers from making utility-maximizing decisions.,Chapter 1,Slide 20,Government intervention in these markets can increase efficiency. Government intervention without a market failure creates inefficiency or deadweight loss.,The Efficiency ofa Competitive Market,Chapter 1,Slide 21,Welfare Loss When PriceIs Held Below Market-Clearing Level,Quantity,Price,Chapter 1,Slide 22,Welfare Loss When PriceIs Held Above Market-Clearing Level,Quantity,Price,Chapter 1,Slide 23,The Market for Human Kidneys,The 1984 National Organ Transplantation Act prohibits the sale of organs for transplantation. Analyzing the Impact of the Act Supply: QS = 8,000 + 0.2P If P = $20,000, Q = 12,000 Demand: QD = 16,000 - 0.2P,Chapter 1,Slide 24,The Market for Kidneys, and Effectsof the 1984 Organ Transplantation Act,Quantity,Price,8,000,4,000,0,$10,000,$30,000,$40,000,Chapter 1,Slide 25,The act limits the quantity supplied (donations) to 8,000. Loss to supplier surplus: A + C = (8,000)($20,000) + (1/2)(4,000