Econ 1000 M2L3

1
Econ 1000 M2L3

• C.L. Mattoli

2
This week

• Mod 2, part2 Markets in Action
• Chapter 4, Layton

3
What you should already know

• You should understand how to think about lost
  opportunity and opportunity cost.
• You should understand that, in a world of limited
  time, people, natural resources, and productive
  capital equipment, that there is a limit on the
  amount of goods and services that can be produced
  at any one time.

4
What you should already know

• You should be able to imagine that the maximum
  capacity production of a mix of goods and
  services is described by the production
  possibilities frontier (PPF)
• That any point to the left of the frontier is
  inefficient, and

5
What you should already know

• Points to the right of the PPF are unattainable
  by the economy, on its own, but a point to the
  right might be attained through trade with
  another economy.
• You should understand how opportunity costs
  relate to moving from one point to another along
  the PPF.

6
What you should already know

• You should understand the behavioral
  underpinnings of the laws of supply and demand,
  which relate quantities supplied and demanded to
  price.
• The laws state that the quantities supplied and
  demanded will vary with price.

7
What you should already know

• The quantities supplied and demanded are the
  dependant variables that depend on price.
• Supply and demand curves, by themselves, dont
  mean that much they are only schedules of
  intentions for buying and selling quantities, if
  prices were at various levels.

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What you should already know

• It is only interesting when we put supply and
  demand together and let them interact to result
  in an equilibrium price at which all quantities
  will be cleared in the market.
• Graphically, in economics, the quantity is
  normally displayed on the horizontal axis and
  price is on the vertical axis.

9
What you should already know

• That is contrary to the normal convention in
  math.
• You may say who cares?, but there is a reason
  that I bring this up slope is always calculated
  as the change in the dependent variable per
  change in independent variable.

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What you should already know

• Also, laws are laws and cannot be broken or we
  need a new laws.
• You should understand how non-price factors can
  transform supply and demand curves into new
  curves.
• You should be able to imagine how surplus and
  shortages will lead to behavior of the players in
  the market place that will eventually result in a
  unique ideal equilibrium market price and
  quantity that will exactly be cleared in the
  market.
• Then, you will be ready to proceed through this
  next part of our analysis

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Learning objectivesModule 2 Market analysis
2.2

• On successful completion of this part of the
  module, you should be able to
• Use the concepts of demand, supply, and market
  equilibrium
• Use the market model to predict the direction of
  change in prices and quantities caused by changes
  in the market-place, and by policy changes
• Explain the concept of market failure and discuss
  causes of such failure

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What you should be able to do in the end

• Explain and illustrate the effects of a change in
  demand on equilibrium price and quantity
• Explain and illustrate the effects of a change in
  supply on equilibrium price and quantity
• Explain and illustrate the effect of the policy
  of setting a price floor in a market
• Explain and illustrate the effect of the policy
  of setting a price ceiling in a market.

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Overview

• We studied concepts of opportunity cost and
  marginal analysis.
• We looked at basic behaviorally based laws of
  supply, demand and market equilibrium.
• In this part of the module, we apply these ways
  of thinking to the further studies of general
  markets.

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Overview

• We examine how and why market equilibriums might
  change.
• We also examine some failures of markets and look
  at various ways that governments intervene in
  markets and what happens when they do.

15
Changes in Market Equilibrium
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Equilibrium changes

• Market Equilibriums can be constantly changing.
• Equilibrium comes about because behaviors cause
  an eventual exact balance of supply and demand at
  a certain price that will exactly clear a market.
• Things in the market might change.
• If peoples perception changes or they get more
  information, they can change their minds.

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Equilibrium changes

• Non-price factors can make changes of whole
  supply and demand lines.
• Of course, if one of the lines changes, supply or
  demand, there will be a new intersection point
  with the old other line, demand or supply.
• If supply changes and demand remains the same,
  there will be a shift of equilibrium along the
  demand line.

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Equilibrium changes

• If demand changes and supply remains the same, a
  new point will be reached on the supply line.
• Changes in supply will cause a new equilibrium
  point on the old demand line.
• Changes in demand will lead to a new intersection
  point on the old supply line. An example of a
  dynamic market in which prices change all day
  long are the stock markets and the commodities
  markets.

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Equilibrium changes

• There, as new buyers and sellers and new
  information come into the markets throughout a
  day equilibrium prices constantly change.
• We shall discuss reasons for such changes and can
  show the situations, graphically, for changes in
  one curve or the other, in order to further
  understand the processes at work.

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Changes in demand

• Only non-price determinants will shift a demand
  curve.
• Simple changes can come from more buyers entering
  a market.
• Advertising, word-of-mouth, or information can
  change demand.

21
Changes in demand

• Example demand rises
• Consider demand at a hair cutting salon. If
  everyone tells their friends that one of the boys
  there gives the most beautiful haircuts of anyone
  in town, the demand curve will shift to the
  right, and more haircuts will be demanded at each
  possible haircut price.
• In the mean time, supply remains the same. The
  boy only works so many hours a day, and he can
  only cut so many heads of hair.

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Changes in demand

• Example demand rises (contd.)
• This will mean that there is a shortage in the
  market.
• As a result, the price of his haircuts will be
  bid up and he will eventually work more hours
  because he is willing to work more and give more
  haircuts at a higher price on his new supply
  schedule.
• We illustrate the situation in a slide, below.

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Changes in demand

• Example demand falls
• Next, consider what might happen to the demand
  for large SUV automobiles, if the price of
  gasoline triples and it is expected to remain
  there or higher.
• Automobiles and gasoline are complementary goods,
  and the result of such a rise in petrol prices
  would likely be a decrease in the whole demand
  schedule for SUVs.

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Changes in demand

• That will leave a surplus in the market.
• As a result, the price and quantity supplied will
  eventually be arrived at a lower price and
  quantity point along the automobile makers
  supply curve.
• We show the 2 situations in the next slide.

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Effects of demand shifts on equilibrium

• Diagrams and causal chains

Increase in Equilibrium price
Increase in Quantity supplied
Decrease in Quantity supplied
Decrease in Equilibrium price
Decrease in demand
Increase in demand
When Haircut demand rises
When SUV demand falls
P










P
S
S
D1
D2
D2
D1
Q
Q
26
Extended causal chains

• We expand the cause and effect chains as

Increase in Equilibrium price
Increase in Quantity supplied
Demanders will begin to bribe suppliers
Increase in demand
Shortage will obtain
Decrease in Quantity supplied
Suppliers Will begin to Discount
Decrease in equilibrium Price
Decrease in demand
Surplus Will exist
27
Changes in supply

• Now, lets look at what happened, if we keep a
  constant demand curve and change supply.
• The supply curve can be transformed into a new
  curve by various non-price factors of the supply
  equation.
• The market will adjust, and a final new
  equilibrium will be reached at the new
  intersection point of the new supply and demand
  curves.

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Changes in supply

• Example technology expands supply
• Suppose that a new process was developed that
  allows palm oil producers to squeeze 10 more oil
  of palm leaves.
• Then, with only that technological change, the
  whole supply curve would shift to the right, and
  more palm oil will be offered at every price in a
  new supply curve.
• In turn, since the industry is now able to supply
  larger quantities at every price there will be a
  temporary glut of palm oil on the market at the
  current equilibrium price.

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Changes in supply

• A surplus will exist because at the balancing
  point of old demand with old supply, the market
  was just clearing the former amount of palm oil
  offered at an equilibrium price, and, now,
  suddenly there is more available than can be
  cleared at that price.
• The signals to suppliers, seeing the glut, will
  lead them to begin to drop the price.
• They will also be willing to offer less in the
  marketplace as they charge less they will move
  down their new supply curve.

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Changes in supply

• The stopping point on the way down will be the
  intersection point of the new supply and the old
  demand curves.
• At that point, supply will be ahead of old supply
  but behind the glut supply level, and the price
  will be that which clears the market.
• A new equilibrium will obtain.

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Changes in supply

• Supply can also decrease, as we have seen with
  oil production over the last thirty years.
  Markets for food stocks can also display
  decreases in supply, as, for example, when there
  is a frost in early be spring, and the orange
  crop suffers.
• Again, we can analyze the affect on market
  equilibrium, and examine the processes at work in
  the marketplace that will take us there.
• Although we assume that the demand curve remains
  unchanged, there could be situations in which
  both supply and demand change.

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Changes in supply

• Example supply recedes
• Suppose that police crack down on street vendors
  selling illegal copies of DVDs on the streets of
  Guangzhou.
• As a result, supply will decrease, and there will
  be a shortage of illegal copies of DVDs on the
  streets of Guangzhou.
• Some people will begin to bid up DVD prices to
  make sure that their neighborhood black market
  DVD dealers save DVDs especially for them.

33
Changes in supply

• We will move up the old illegal DVD demand curve
  until we reach a price at which illegal DVDs
  are exactly cleared in the marketplace.
• A new equilibrium price and quantity will
  eventually obtain at the intersection of the old
  demand curve and the new supply curve.
• The price will be above the old price and the
  quantity cleared will be down.

34
Supply Changes

• Causal chain and graphs.
• Note there is a mistake in the arrow for price in
  the graph in the book on page 92 for decrease in
  supply

Decrease in Equilibrium price
Increase in Quantity demanded
Increase in Equilibrium price
Decrease in quantity demand
Increase in supply
Decrease in supply
P










P
S2
S1
S1
S2
D
D
Q
Q
35
Extended causal chains

• We expand the cause and effect chains as

Increase in Equilibrium price
Decrease in Quantity demanded
Demanders will begin to bribe suppliers
Decrease in supply
Shortage will obtain
Increase in Quantity demanded
Suppliers Will begin to Discount
Decrease in equilibrium Price
Increase in supply
Surplus Will exist
36
Changes in both

• Theres no reason that supply and demand cannot
  both change.
• To truly analyze an exact new equilibrium point
  for that situation, we would need more precise
  supply and demand schedules than the general
  graphical representations that we have relied on
  when only one, supply or demand, was changed.
• There are 4 possible scenarios with both
  changing. Both could increase, both could
  decrease, or one could go one way and the other,
  the other.

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Changes in both

• If both curves change, the outcome for price and
  clearing quaintly after the changes may be more
  or less than before the changes, depending on the
  size and direction of each change.
• Using the logic that we have developed for the
  cases of one changing, we could follow the forces
  that will come to bear on reaching a new
  equilibrium price and a new quantity that will
  clear in the market.
• We show a few possibilities in the next slide.

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Changes in both

• We show some of the possible combinations of dual
  changes in supply and demand, although there are
  additional possibilities.
• Even the outcomes shown could be different for
  the types of changes displayed

P










P
S2
S1
S1
S2
D1
D2
D2
D1
Q
Q
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Laws are laws Trying to Violate the Laws
40
Government Dickering in Markets

• Governments all around the world try to affect
  some of the markets in their economies.
• Their objectives are either to set minimum or
  maximum prices in certain markets.
• Thus, they seek to either prevent some prices
  from rising to equilibrium or to keep others
  above equilibrium
• For example, a favorite market in which
  governments like to set price floors (minimums)
  is wages.
• A market in which they like to set price
  ceilings (maximums) is the market for rental
  housing.

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Ceilings

• A price ceiling is a legally established maximum
  price that a seller can charge for a good or
  service
• Rent controls are common in many U.S. cities. In
  other countries, government housing is subsidized
  to make rental prices lower.
• The rationale for rent controls or subsidies is
  to provide a necessity to people that would be
  unaffordable many people at the true equilibrium
  price.

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Ceilings

• So, will the market for rental units simply
  conform to the situation that the government
  dictated, or will market forces still be at work?
• We shall see why many economists believe such
  controls are counter-productive and, in fact,
  lead to other more subtle costs.

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Ceilings

• Assume that market supply and demand curves are
  as shown in the figure, below, and equilibrium
  would be at a point with rental price of 600 per
  month and a cleared quantity 6 million units per
  month.
• Supply and demand theory will predict that, if a
  ceiling of 400 per month is artificially placed
  on market price, there will be 4 million units
  supplied, while demand is for 8 million units per
  month.
• The result is that a shortage of 4 million units
  per month will persist in the market (see next
  slide)

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Ceilings

• Graphic effect of rental ceiling on market.

Causal Chain
Quantity demanded Exceeds quantity Supplied at
price
Price Ceiling On rents
Shortage of Units obtains
P





1000
D
Rental price per month
S
800
600
Ceiling
400
Housing Shortage
200
Q
600
400
800
200
1000
Millions of units per month
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Ceilings costs and bad behaviors

• Of course, rigging a market and not allowing
  market forces to prevail will result in some
  adverse affects.
• Tenants
• Tenants will spend more time looking for housing
  or spend more time on waiting lists to get
  housing. This is opportunity cost to the tenant.
• The artificially low rent might evolve a black
  market, an illegal hidden market, by tenants.
  They might sublet their units at a higher price
  to someone else and make an illegal profit for
  themselves.

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Ceilings costs and bad behaviors

• Landlords
• Because of substandard rents landlords might
  skimp on maintenance and leave units in bad or
  even dangerous repair.
• Landlords might also resort to discrimination and
  preferential treatment of renters in the market
  by giving preference to family and friends, even
  though they come onto lists behind others.
• In the end, ceilings lead to inefficient and
  undesirable behavior

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Price Ceiling Revenues
Revenue ( PxQ) at Equilibrium Revenue
with ceiling
P
S0
P0
P1
D0
Q0
Q
Q1
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Ceiling Economical alternatives

• Economists might suggest an alternative of
  subsidizing rental payments, directly, for low
  income people.
• Then, low income people will be able to afford
  rentals at the market price.
• More importantly, market forces will be allowed
  to determine rental prices and availability, and
  the market will clear with no shortage, surplus,
  inefficiency, or misbehavior.
• Although price ceilings were common throughout
  the world in the 20th century, they are steadily
  disappearing as governments allow markets to work
  on their own, while they seek better alternatives
  to increase their citizens general welfare

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Break time

• Take 10 minute break
• Use time to come up and ask questions

50
Floors

• A floor is a legally established minimum that a
  seller may charge for a good or service.
• A common price that governments put floors on is
  wages minimum wages.
• Assume that we have the usual downward sloping
  demand schedule for unskilled labor. At a higher
  wage, business will hire less unskilled workers
  at a lower rate, they will hire more workers.
• Concerning supply, workers will be willing to
  give up more free-time and work more hours in a
  year for higher wages and will want to work fewer
  hours for less wages.

51
Floors minimum wage

• If left to their own bargaining, the market would
  establish an equilibrium price and a
  corresponding quantity of labor employed.
• The intention is to help unskilled labor have a
  higher standard of living, but will a minimum
  wage really help?
• First of all, the supply of willing workers will
  expand to the point on the supply curve
  corresponding to the minimum wage price.
• On the other hand, demand will be up the demand
  curve to the point represented by the minimum
  wage.

52
Floors minimum wage

• Unfortunately, there will be less of a demand for
  unskilled labor than there is supply, and
  unemployment will obtain.
• Rather than pay such a high price for unskilled
  workers, companies will add skilled workers or
  replace labor with equipment.
• Thus, as a result of enacting a minimum wage, the
  government unwittingly encourages business to use
  less unskilled labor, and there will be a higher
  rate of unemployment in the unskilled labor
  market.
• Thus, the whole exercise is counterproductive.

53
Minimum wage economical alternative

• Many economists would suggest that rather than
  fixing a minimum wage, the government, just as in
  the case with rent ceilings, would do better by
  subsidizing workers wages by giving them
  welfare payments, directly.
• Again, it appears that it is more efficient to
  allow the markets to work on their own and to
  find an alternative means of trying to help the
  less well-off members of the society.

54
Minimum wage counterarguments

• However, other economists argue that by
  installing a minimum wage, employers will
  ultimately be forced to upgrade the skills and
  productivity of workers.
• Still others argue that at least some of the less
  better off would be raised up in their standards
  of living and that the resulting unemployment of
  others is a fair price to pay for to pay for the
  majority.

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Graphical minimum wage

• Classical graphical minimum wage market.

Causal Chain
Quantity demanded Falls short of
quantity Supplied at price
Unemployment Of unskilled workers
Price Floor On Wages
P
Hourly wages unskilled labor





10
S
D
Unemployment
8
Floor
6
4
2
600
Q
400
300
500
200
100,000s annual unskilled labor hours
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Market Failures
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Why fail?

• We have learned how markets are supposed to
  operate/
• Normally, the price system is expected to
  efficiently coordinate society's economic
  transactions, but there can be instances of
  failure of the market system.
• Market failures mean that the price system fails
  to operate efficiently, and society loses
  benefits.
• We shall look at 4 causes lack of competition,
  externalities, public goods, and income
  inequality.

58
Lack of competition

• The market theory assumes that there is intense
  competition among both consumers and producers.
• If producers collude to restrict output,
  artificially raising the price above its natural
  equilibrium, they will be able to reap extra
  profits.
• Especially new markets or markets that are little
  understood may have a lack of competition.

59
Lack of competition

• That will mean that prices and quantities are not
  what they could be.
• By subverting consumer sovereignty, business
  might reduce the well-being of society by wasting
  resources or by retarding technology and
  innovation.

60
How can they do that?

• Anticompetitive behavior is illegal in many
  countries, but it still exists in the world.
  Many countries even have government organizations
  to keep a watchful eye and protect society
  against such behavior.
• There is the ACCC ( Australian Competition and
  Consumer Commission) in Australia, the Federal
  Trade Commission (FTC), in the U.S., and the
  European Unions Competition Bureau, in Europe.

61
How can they do that?

• Cartels, groups of producers, band together to
  restrict output, and rig prices.
• Two of the most common examples of cartels are
  the petroleum producer cartel, OPEC, and the
  diamond producers cartel. Both restrict output
  to keep prices at artificial levels.

62
Rigging the market for supply

• We understand that the way markets work is that
  supply curve intersects with the demand curve,
  and that intersection point will be the price at
  which the market will exactly clear the quantity
  offered for sale.
• That process assumes consumer sovereignty.

63
Rigging the market for supply

• Then, suppliers will offer what they are
  comfortable with, considering their profits
  versus opportunities, and their offerings will be
  displayed in a supply schedule.
• Consumers will compete for supplies by bidding up
  prices to the point at which their demand exactly
  clears the market of all supply.

64
Rigging the market for supply

• However, if suppliers conspire to restrict their
  output, they can offer supplies along a supply
  curve that does not represent their efficient
  decision-making or use of resources.
• By moving their supply curve upward, they will be
  able to move the intersection point with the
  demand curve to a higher price per unit at less
  output than they could efficiently produce and
  they can make excess profits.
• We show the potential situation in the next slide.

65
Rigging supply higher prices, less available

• In the figure we show the natural supply and
  demand curves, along with a restricted collusive
  supply line.
• The result is a new intersection point on the
  demand line with a higher price than the true
  free-market price and less available quantities

Restricted supply market





P
D
Sfree
SRestricted
Prestricted
Pfree
Qfree
Q
Qresticted
66
Case study Commissions on stock trades in the
U.S.

• Corporate Stocks are traded on stock exchanges
  and also OTC.
• There are barriers to entry in both. For
  example, a membership on the New York stock
  exchange (NYSE) will cost over 1 million, and to
  trade on the NASDAQ market means membership in
  the NASD. The cost to go through the process of
  filing and registering as a BD was around
  50,000.
• In the early 1980s, commissions on buying stock
  were as much as 1 per share.

67
Case study Commissions on stock trades in the
U.S.

• There was basically a lack of competition in
  commission business because of the limited number
  of seats on the NYSE and the high cost of a seat.
  In the mid-1980s, an apparent loop-hole in the
  rules of the SEC and the NYSE was exploited If
  you were a registered broker-dealer (BD), you
  could gain access to the commissions charged for
  brokerage and clearing, about 1.5 cents.

68
Case study Commissions on stock trades in the
U.S.

• In addition, you would also have advantageous
  capital, margin, and short requirements, similar
  to NYSE members.
• People began to take advantage of this template.
  With the growth of day trading salons and
  internet trading, some of those people built
  businesses around trading prices of 5 cents per
  share, and commissions have come down
  substantially over the past 20 years for all
  broker accounts.

69
Externalities

• Markets can display failure because of
  side-effects called externalities imposed on
  people other than the actual consumers and
  producers in a market.
• Externalities, also called spillover effects or
  neighborhood effects, are costs or benefits to
  people, third parties, other than the actual
  market participants.
• Thus, externalities can be either positive or
  negative.
• Externalities can be consumption-derived or
  production-derived.

70
Externalities simple examples

• If the person next door to you in the dorm, plays
  loud music late at night, it might interfere with
  either your sleep or your studying.
• It is a negative consumption-based externality,
  based on your neighbors music consumption
  habits.
• You drive through a community where all the
  houses are beautifully painted and have
  magnificent gardens.

71
Externalities simple examples

• You derive pleasure from the scenery, even though
  you had to contribute nothings, and you enjoy the
  fruits of other peoples production efforts.
• It is a positive production-based externality.
• Another example of a positive production
  externality is spillover of technological
  developments from RD of one firm to others.
  This is actually very important to growth of an
  economy.

72
Externalities some are of great concern

• Externalities are not a minor aspect of market
  failure. They can have enormous impact on the
  quality of life.
• Remember that people are self-interested.
  Sometimes self-interest can have a damaging
  affect on society, and sometimes it can have a
  positive affect.
• We shall look at major examples of both
  pollution as a negative and immunization against
  disease as a positive.

73
Pollution negative production externality

• Consider a steel industry that uses coal to
  produce steel without pollution-control equipment
  to limit the amount of poisonous smoke and ash
  poured into the earths atmosphere.
• The effect of the foul air is to reduce property
  values, increase the cost of health care,
  contribute to global warming, and generally erode
  the quality of life for third parties.

74
Pollution negative production externality

• Because of these detrimental external affects,
  the equilibrium price in the market does not
  reflect the true cost of steel production to the
  society.
• The equilibrium price of steel is too low because
  steel supply curves do not reflect those costs,
  and the output is too high. The output is above
  what should be socially desirable.

75
Pollution true costs

• If producers supply curves were, somehow, to
  include all of the external costs, the supply
  curve would shift upward, and the equilibrium
  price would be higher than the existing market
  and suppliers would produce less output as shown,
  below.

Pollution costs and supply





P
D
SNPC
SPC
PPC
PNPC
QNPC
Q
QPC
76
Pollution externalities costs restrict supply

• You might notice that the result is the same
  result that we found for an industry of collusive
  producers.
• In a collusive market, supply is restricted by
  producers to increase price.
• In pollution, society forces costs onto the
  producer to pay for the cost of the external
  losses to society that he causes.
• By understanding the true costs of production
  that is produced by industries or companies that
  pollute the environment, society can begin to
  find remedies to assure that the final
  equilibrium prices and quantities reflect those
  costs.

77
Pollution costs remedies

• There are 2 basic approaches to adding the costs
  of externalities to producers costs and changing
  the supply curve taxes and regulation.
• The government can charge a tax to producers.
  The tax is an added cost of production, which
  will be passed on to consumers of their product,
  and a new supply curve will intersect demand at a
  higher price and lower quantity. The taxes can
  be used to compensate the third parties affected
  by the damaging behavior of the company.
• Pollution taxes might also encourage producers to
  install pollution control devices, on their own,
  in order to pay less tax.

78
Pollution costs remedies

• The other alternative is to make regulation
  requiring companies to reduce pollution. In this
  remedy, producers are forced to purchase, install
  and maintain pollution control equipment. Then,
  pollution will be reduced, and the costs to
  society will be reduced or eliminated.
• The extra cost of equipment will cause the cost
  of production to increase, and equilibrium will
  obtain at a higher price and lower output.

79
Pollution costs remedies

• However, the cost of complete elimination of
  pollutants is prohibitive, so not all pollution
  will be eliminated through equipment. Moreover,
  producers can cheat on their polluting.
• The tax method can eliminate all of the cost, but
  is still left with the uncertainty of the real
  long term costs of pollution.
• Most countries prefer the tax approach because it
  can cover costs and it is easy to adjust.

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Immunization case study

• In pollution, we found that the supply curve can
  understate the costs to society of production.
  In immunization, the demand curve can understate
  benefits to society.
• Modern medicine provides vaccines against many
  debilitating illnesses. People usually have
  their children immunized when they are very
  young.
• People other than those paying for immunization,
  free-riders, because since many people pay for
  inoculation the disease becomes less common.

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Immunization case study

• Thus, the demand curve does not truly reflect all
  of the external benefits, and adjustment must be
  made to account for them.
• Because demand does not reflect all benefits,
  producers will produce less at lower prices, and
  there is inefficient allocation of resources to
  the diseases immunization effort.
• Now the government can use two methods to change
  the demand curve subsidies or regulation.
• We show the situation graphically, in the next
  slide.

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Immunization unpaid benefits

• Demand does not reflect reality because
  free-riders do not pay for but receive the
  benefits of immunization.
• Thus, equilibrium price and quantity are too low.

Immunization benefits and demand





P
DIB
S
DNIB
PIB
PNIB
QNIB
Q
QIB
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Immunization redistributing unpaid benefits

• Refunding subsidies are one means of paying for
  benefits.
• This approach involves a payment by the
  government to people who have their children
  immunized.
• In this manner, dollar benefits are gained only
  by those who pay for immunization.

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Immunization redistributing unpaid benefits

• Others still benefit but the cost of the benefit
  is also shifted to those who do not pay for it
  directly.
• The monetary payment might induce parents to have
  children immunized.
• Only when they are immunized can a parent be
  truly confident of no disease and extra costs for
  medical care.
• Demand may shift.

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Immunization redistributing unpaid benefits

• What would happen, if immunization was completely
  subsidized? Would everyone simply choose to
  inoculate their children, and the problem
  completely solved?
• The answer to that has been seen in Australias
  decline in immunization even though it is
  completely subsidized by the government.
• That leads us to consider an alternative for
  capturing, quantifying, and costing out the
  benefit of immunization regulation.

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Immunization redistributing unpaid benefits

• Another means of ensuring that all pay for the
  benefit of immunization is to regulate and
  require that all children, by a certain age, must
  be immunized against certain major diseases.
• In the U.S., for example, children are, on the
  one hand not allowed to enroll in school, if they
  have not been immunized against certain diseases,
  like polio or measles. On the other hand,
  children of school age are legally required to go
  to school.

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Immunization redistributing unpaid benefits

• In any event, although it may not be completely
  enforceable, laws requiring immunization will
  shift the demand curve right, and a proper
  efficient equilibrium will occur at a higher
  price and output, thus encouraging the health
  industry to continue to pursue immunization
  research and delivery

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Public Goods
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Public Goods

• There are certain goods and services that are
  valuable to the welfare of the society but that
  would not be made available and purchased in
  sufficient quantities without government
  intervention.
• Public goods are things like national defense,
  interstate roadways, and police protection,
• Public goods are goods and services that, once
  produced, have 2 special characteristics
• The benefit is collectively consumed.
• There is no way to prevent free-riders from
  taking advantage of the benefit,

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Immigration control an example

• Suppose that, instead of the national coast guard
  patrolling the coast of Australia, a private firm
  offered to guard against the entry of illegal
  aliens, and that the service was offered to
  individuals.
• Then, all individuals, in the society, could
  decide whether or not they want to pay for the
  coast guarding service.
• The result will be that some, if not all, members
  of the society will attempt to free-ride, while
  reaping the benefits that others pay for, and the
  market will either under-produce or not produce.

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Providing public goods

• Because these markets are likely to fail,
  otherwise, governments tax their citizens and
  provide public goods and services for them.
• The government does not have to undertake
  production, itself. It can contract out the
  production to the private sector.
• It can force payment and eliminate the free-rider
  problem.

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Income inequality
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Inefficiency versus inequality

• In the previous market failure situations that we
  described, the markets are inefficient because
  they allocate too many or too few productive
  resources to producing particular goods or
  services.
• Even when markets are operating efficiently, they
  may result in a very uneven distribution of
  income among the members of a society.
• Professional basketball players, CEOs and
  doctors get huge incomes, while the unskilled and
  disabled get small or no wages.

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So what?

• Some politicians and economists argue that
  something should be done about this inequality.
• Others point out that income inequality provides
  incentive to gain skills and get a higher income.
• Many governments, nonetheless, do feel a need to
  do something to cure some of the inequality.

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So what?

• They provide welfare payments to the poor or
  disabled. They have progressive income tax
  systems in which higher amounts of income are
  taxed at higher percentage rates, like those in
  Australia.
• Others argue that high earners should be taxed
  less to provide incentive for them to work hard
  and continue accumulate wealth

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Ask Yourself

1. How can you find producers total revenue from
   the supply-demand equilibrium graph?
2. Name several reasons/situations that the
   government might get involved in markets.
3. What do you expect will happen if a price ceiling
   is lifted in a market? A price floor?

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Exam Prep Problems

• A shift in either the demand or supply curve for
  a particular good will cause a change in the
  equilibrium price and quantity of that good. If
  the price of the good increased
• (a) describe the changes in those factors that
  would be likely to cause an increase in price
• (b) illustrate the effect of these changes on the
  price and quantity equilibrium and
• (c) explain and show how the price elasticity of
  demand will affect the sellers revenue should
  there be an increase in the price of this
  good.(Next weeks lecture)

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Problems due in tutorial

• Chapter 4
• Problems 1-10
• Multiple choice 1-12

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Next week

• Next week we discuss the concept of elasticity,
  which will require some mathematical
  understanding.
• We shall cover chapter 5.

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END