1、Chapter 11APPLIED COMPETITIVE ANALYSISCopyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.1Economic Efficiency and Welfare AnalysisThe area between the demand and the supply curve represents the sum of consumer and producer surplusmeasures the total additional value

2、obtained by market participants by being able to make market transactionsThis area is maximized at the competitive market equilibrium2Economic Efficiency and Welfare AnalysisQuantityPriceP *Q *SDConsumer surplus is thearea above price and belowdemandProducer surplus is thearea below price andabove s

3、upply3At output Q1, total surpluswill be smallerEconomic Efficiency and Welfare AnalysisQuantityPriceP *Q *SDQ1At outputs between Q1 andQ*, demanders would valuean additional unit more thanit would cost suppliers toproduce4Economic Efficiency and Welfare AnalysisMathematically, we wish to maximizeco

4、nsumer surplus + producer surplus = In long-run equilibria along the long-run supply curve, P(Q) = AC = MC5Economic Efficiency and Welfare AnalysisMaximizing total surplus with respect to Q yieldsU(Q) = P(Q) = AC = MCmaximization occurs where the marginal value of Q to the representative consumer is

5、 equal to market pricethe market equilibrium6Welfare Loss ComputationsUse of consumer and producer surplus notions makes possible the explicit calculation of welfare losses caused by restrictions on voluntary transactionsin the case of linear demand and supply curves, the calculation is simple becau

6、se the areas of loss are often triangular7Welfare Loss ComputationsSuppose that the demand is given byQD = 10 - P and supply is given byQS = P - 2Market equilibrium occurs where P* = 6 and Q* = 48Welfare Loss ComputationsRestriction of output to Q0 = 3 would create a gap between what demanders are w

7、illing to pay (PD) and what suppliers require (PS)PD = 10 - 3 = 7PS = 2 + 3 = 59The welfare loss from restricting outputto 3 is the area of a triangleWelfare Loss ComputationsQuantityPriceSD64753The loss = (0.5)(2)(1) = 110Welfare Loss ComputationsThe welfare loss will be shared by producers and con

8、sumersIn general, it will depend on the price elasticity of demand and the price elasticity of supply to determine who bears the larger portion of the lossthe side of the market with the smallest price elasticity (in absolute value)11Price Controls and ShortagesSometimes governments may seek to cont

9、rol prices at below equilibrium levelsthis will lead to a shortageWe can look at the changes in producer and consumer surplus from this policy to analyze its impact on welfare12Price Controls and ShortagesQuantityPriceSSDLSP1Q1Initially, the market isin long-run equilibriumat P1, Q1Demand increases

10、to DD13Price Controls and ShortagesQuantityPriceSSDLSP1Q1DFirms would begin toenter the industryIn the short run, pricerises to P2P2The price would endup at P3P314Price Controls and ShortagesQuantityPriceSSDLSP1Q1DP3There will be a shortage equal toQ2 - Q1Q2Suppose that thegovernment imposesa price

11、ceiling at P115This gain in consumersurplus is the shadedrectanglePrice Controls and ShortagesQuantityPriceSSDLSP1Q1DP3Q2Some buyers will gain because they can purchase the good for a lower price16The shaded rectangletherefore represents apure transfer fromproducers to consumersPrice Controls and Sh

12、ortagesQuantityPriceDP1Q1DSSLSP3Q2The gain to consumers is also a loss to producers who now receive a lower priceNo welfare loss there17This shaded trianglerepresents the value of additional consumer surplus that would have been attained without the price controlPrice Controls and ShortagesQuantityP

13、riceSSDLSP1Q1DP3Q218This shaded trianglerepresents the value of additional producer surplus that would have been attained without the price controlPrice Controls and ShortagesQuantityPriceSSDLSP1Q1DP3Q219This shaded arearepresents the total value of mutually beneficial transactions that are prevente

14、d by the governmentPrice Controls and ShortagesQuantityPriceSSDLSP1Q1DP3Q2This is a measure of the pure welfare costs of this policy20Disequilibrium BehaviorAssuming that observed market outcomes are generated byQ(P1) = min QD(P1),QS(P1), suppliers will be content with the outcome but demanders will

15、 notThis could lead to a black market21Tax IncidenceTo discuss the effects of a per-unit tax (t), we need to make a distinction between the price paid by buyers (PD) and the price received by sellers (PS)PD - PS = tIn terms of small price changes, we wish to examinedPD - dPS = dt22Tax IncidenceMaint

16、enance of equilibrium in the market requiresdQD = dQS orDPdPD = SPdPSSubstituting, we getDPdPD = SPdPS = SP(dPD - dt)23Tax IncidenceWe can now solve for the effect of the tax on PD:Similarly,24Tax IncidenceBecause eD 0 and eS 0, dPD /dt 0 and dPS /dt 0If demand is perfectly inelastic (eD = 0), the p

17、er-unit tax is completely paid by demandersIf demand is perfectly elastic (eD = ), the per-unit tax is completely paid by suppliers25Tax IncidenceIn general, the actor with the less elastic responses (in absolute value) will experience most of the price change caused by the tax26Tax IncidenceQuantit

18、yPriceSDP*Q*PDPSA per-unit tax creates awedge between the pricethat buyers pay (PD) andthe price that sellers receive (PS)tQ*27Buyers incur a welfare lossequal to the shaded areaTax IncidenceQuantityPriceSDP*Q*PDPSQ*But some of this loss goesto the government in theform of tax revenue28Sellers also

19、incur a welfareloss equal to the shaded areaTax IncidenceQuantityPriceSDP*Q*PDPSQ*But some of this loss goesto the government in theform of tax revenue29Therefore, this is the dead-weight loss from the taxTax IncidenceQuantityPriceSDP*Q*PDPSQ*30Deadweight Loss and ElasticityAll nonlump-sum taxes inv

20、olve deadweight lossesthe size of the losses will depend on the elasticities of supply and demandA linear approximation to the deadweight loss accompanying a small tax, dt, is given byDW = -0.5(dt)(dQ)31Deadweight Loss and ElasticityFrom the definition of elasticity, we know thatdQ = eDdPD Q0/P0This

21、 implies thatdQ = eD eS /(eS - eD) dt Q0/P0Substituting, we get32Deadweight Loss and ElasticityDeadweight losses are zero if either eD or eS are zerothe tax does not alter the quantity of the good that is tradedDeadweight losses are smaller in situations where eD or eS are small33Transactions CostsT

22、ransactions costs can also create a wedge between the price the buyer pays and the price the seller receivesreal estate agent feesbroker fees for the sale of stocksIf the transactions costs are on a per-unit basis, these costs will be shared by the buyer and sellerdepends on the specific elasticitie

23、s involved34Gains from International TradeQuantityPriceSDQ*P*In the absence ofinternational trade,the domesticequilibrium price would be P* andthe domesticequilibrium quantitywould be Q*35Gains from International TradeQuantityPriceQ*P*SDQuantity demanded willrise to Q1 and quantitysupplied will fall

24、 to Q2Q1Q2If the world price (PW)is less than the domesticprice, the price will fallto PWPWImports = Q1 - Q2imports36Consumer surplus risesProducer surplus fallsThere is an unambiguouswelfare gainGains from International TradeQuantityPriceQ*P*SDQ2Q1PW37Effects of a TariffQuantityPriceSDQ1Q2PWQuantit

25、y demanded fallsto Q3 and quantity suppliedrises to Q4Q4Q3Suppose that the governmentcreates a tariff that raisesthe price to PRPRImports are now Q3 - Q4imports38Consumer surplus fallsProducer surplus risesThese two triangles represent deadweight lossThe government getstariff revenueEffects of a Tar

26、iffQuantityPriceSDQ1Q2PWQ4Q3PR39Quantitative Estimates of Deadweight LossesEstimates of the sizes of the welfare loss triangle can be calculatedBecause PR = (1+t)PW, the proportional change in quantity demanded is40The areas of these twotriangles areQuantitative Estimates of Deadweight Losses Quanti

27、tyPriceSDQ1Q2PWQ4Q3PR41Other Trade RestrictionsA quota that limits imports to Q3 - Q4 would have effects that are similar to those for the tariffsame decline in consumer surplussame increase in producer surplusOne big difference is that the quota does not give the government any tariff revenuethe de

28、adweight loss will be larger42Trade and TariffsIf the market demand curve isQD = 200P-1.2 and the market supply curve isQS = 1.3P, the domestic long-run equilibrium will occur where P* = 9.87 and Q* = 12.843Trade and TariffsIf the world price was PW = 9, QD would be 14.3 and QS would be 11.7imports

29、will be 2.6If the government placed a tariff of 0.5 on each unit sold, the world price will be PW = 9.5imports will fall to 1.044Trade and TariffsThe welfare effect of the tariff can be calculatedDW1 = 0.5(0.5)(14.3 - 13.4) = 0.225DW2 = 0.5(0.5)(12.4 - 11.7) = 0.175Thus, total deadweight loss from t

30、he tariff is 0.225 + 0.175 = 0.445Important Points to Note:The concepts of consumer and producer surplus provide useful ways of analyzing the effects of economic changes on the welfare of market participantschanges in consumer surplus represent changes in the overall utility consumers receive from consuming a particular goodchanges in long-run producer surplus represent changes in the returns product inputs receive46I