Principles of Economics I
week 4 – chapters 10 and 11
Hana Džmuráňová
[email protected]
Info – outline of seminars
Week (Winter)
1
Day (2016)
5 th October
2
Lecturer: Hana Džmuráňová
12 th October
Lecturer: Hana Džmuráňová
3
19 th October
Lecturer: Hana Moravcová
4
26 th October
5
Lecturer: Vědunka Kopečná
2 nd November
Lecturer: Hana Džmuráňová
6
9 th November
7
Lecturer: Hana Džmuráňová
16 th November
8
Lecturer: Vědunka Kopečná
23 th November
9
Lecturer: Vědunka Kopečná
30 th November
Lecturer: Hana Moravcová
10
7 th December
11
Lecturer: Hana Moravcová
14 th December
Lecturer: Hana Moravcová
12
21 st December
Lecturer: Vědunka Kopečná
Themes
Book chapters
Ten Principles o f Economics; 1 + 2
Thinking Like an Economist
The Market Forc es o f Supply 4 + 5
and D emand; El asticity and Its
Application
Supply,
Dem and
and 6 + 21
Governm ent
Policies;
The
Theory of Consumer Choice
cancelled
Consumer s, Produc ers, and the 7 + 8 + 12
Efficiency o f Markets; , The
Costs of Taxation; The D esign of
the Tax System
Extern alities; Public Goods and 10 + 11
Common Resources
The Co sts o f Production; Firms 13 + 14
in Competitive Markets
Monopoly;
Oligopoly; 15 + 16 + 17
Monopolistic Competition
The Markets for th e Factors of 18 + 19
Production;
Earnings
and
Discrimination
Income Inequality and Poverty
20
Interdep end ence and the Gains 3 + 9
from Trade; International Trade
Frontiers of Microeconomics
22
Outline
• Exercises from the last seminar
• Externalities (chapter 10)
• Common good and resources (chapter 11)
Exercise 4
Suppose that a market is described by the following supply and demand equations: Qs = 2P
Qd = 300–P a) Solve for the equilibrium price and the equilibrium quantity.
b) Suppose that a tax of T is placed on buyers, so the new demand equation is Qd = 300 – (P + T). Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?
c) Tax revenue is T*Q. Use your answer to part (b) to solve for tax revenue as a function of T. Graph this relationship for T between 0 and 300. Exercise 4 cont. (covered on seminar 6) d) The deadweight loss of a tax is the area of the
triangle between the supply and demand curves. Recalling that the area of a triangle is 1⁄2*base*height, solve for deadweight loss as a function of T. Graph this
relationship for T between 0 and 300. Exercise 5 (covered on seminar 6)
Fill out the table below assuming that the government taxes 20 percent of the first €30,000 of income and 50 percent of all income above €30,000. Exercise 5
• Compare the taxes for someone earning €10,000 to those of someone earning €50,000 in part (a) above. Is this tax system progressive, regressive, or proportional? Explain. Externalities
Externalities
Who paid attention in the morning?
Fill in missing words.
„When a transaction between a buyer and a seller …………. affects a third party, the effect is called an externality. If an activity yields negative externality, such as pollution, the socially optimal quantity in the market is ………… than the equilibrium quantity. If an activity yields …………..
externalities, such as technology spillover, socially optimal quantity is …………than the equilibrium quantity.“
Externalities
à Externality arises whenever someone engages in an activity that influences someone else´s well-­‐
being without paying or receiving compensation for such activity
à Market is not at its optimum due to the fact that either too much of a good is produced than is socially optimal (i.e. social costs are higher than producers´ costs) or less of a good is produced than is socially optimal
Negative externality
Negative externality -­‐ the impact of externality on a society or a person is negative
Positive externality
Positive externality -­‐ the impact of externality on a society or a person is positive
Externalities – how to solve
• Internalizing externality – means to impose a price on an externality
• Regulation – targeted at negative externalities
– maximum level of pollution, maximum amount produced, ….
• Corrective taxes – targeted at negative externalities
– Pigovian taxes
– Move allocation of resources closer to the social optimum by imposing a cost on a negative externality
• ??? Why economists usually prefer corrective taxes to regulations in case of dealing with a pollution????
Externalities – how to solve
• Subsidies – targeted at positive externalities
• Private solution
– Common sense and the way how people behave
– Charities
– Coase theorem (bargaining between private parties leads to social optimum)
• but private solutions do not work always:
– bargaining bears transaction costs
– argument may arise
– sometimes too many counterparties have to interact à bargaining becomes impossible
Externalities – Exercises
1. Can you give more examples of positive and negative externalities (other than those already discussed
today)?
2. In what way does the patent system help society solve an externality problem?
3. List at least two ways that the problems caused by
externalities can be solved without and with
government intervention.
Externalities – Exercises
There are three coal firms in Coal Walley with following pollution level and cost of reducing pollution by 1 unit as in the table. The government wants to reduce pollution to 120 units, so that it gives each firm 40 tradable pollution permits. Answer following questions:
a) Who sells permits and how Coal
Initial
Cost of
producer
pollution
reducing
many permits do they sell?
level (in pollution by b) Who buys permits and how units)
1 unit (in many permits do they buy?
euros)
c) Why sellers and buyers are willing to do so? A
70
20
d) What is the total cost of B
80
25
pollution reduction in this C
50
10
situation? e) How much higher would the cost of pollution reduction would
be if permits could not be traded?
Externalities – Exercises
The information below provides the prices and quantities in a hypothetical market for automobile antifreeze:
a) Plot the supply and demand curves for antifreeze
b) What is the equilibrium price and quantity generated by buyers and sellers in the market?
Externalities – Exercises
c) Suppose that the production of antifreeze generates pollution in the form of chemical runoff and that the pollution imposes a €2 cost on society for each gallon of antifreeze produced. Plot the social cost curve.
d) What is the optimal quantity of antifreeze production? Does the market overproduce or under produce antifreeze? e) If the government were to intervene to make this market efficient, should it impose a Pigovian tax or a subsidy? What is the value of the appropriate tax or subsidy? Public goods and common resources –
Exercises
Who paid attention in the morning?
„Goods differ whether they are excludable and whether they are rival in consumption. A good is excludable if it is possible to ……… someone from using it.“ A good is ……………………………… if one person´s use of the good reduces a possibility of the other person to use the same unit of a good. Markets work …… for private goods. Public goods and common resources –
what is it and why it matters
à Some goods are (sometimes) without prices (air, watter, mushrooms in the forest)
à Free-­‐rider problem – sometimes you can benefit from something without paying à than a market is
not able to find efficient solution as some people
will be free-­‐riders. Do you know what tragedy of
commons tells us?
Public goods and common resources –
types of goods
vExcludability (possibility to prevent someone
from using the good)
vRivalry in consumption (usage of one person reduces the possibility of the other to use it)
Public goods and common resources –
types of goods
1. Private goods – both excludable and rival in consumption
2. Public goods – neither excludable and rival in consumption
3. Common resources – non-­‐excludable but rival in consumption
4. Club goods -­‐ excludable but non-­‐rival in consumption
Public goods and common resources –
types of goods
Public goods and common resources –
Exercises
Assign types of goods to following goods:
a)
b)
c)
d)
Police protection
Rural roads
City streets
Snow plowing
Public goods and common resources –
Exercises
Wifi high speed internet is provided for free in the
school library.
a) firstly, few students know about it, what type of a good it is and why?
b) lately, more students know, which results in the fall
in the speed of the connection – what type of a good it is now and why?