CHAPTER9THEANALYSISOFCOMPETITIVEMARKETSTEACHINGNOTESWiththeexceptionofChapter1,Chapter9isthemoststraightforwardandeasilyunderstoodchapterinthetext.Thechapterbeginswithareviewofconsumerandproducersurplusinsection9.1.Ifyouhavepostponedthesetopics,youshouldcarefullyexplainthedefinitionofeach.Section9.2discussesthebasicconceptofefficiencyincompetitivemarketsbycomparingcompetitiveoutcomeswiththoseundermarketfailure.AmoredetaileddiscussionofefficiencyispresentedinChapter16.Sections9.3to9.6presentexamplesofgovernmentpoliciesthatcausethemarketequilibriumtodifferfromthecompetitive,efficientequilibrium.Theinstructorcanpickandchooseamongsections9.3to9.6dependingontimeconstraintsandpersonalpreference.Thepresentationineachofthesesectionsfollowsthesameformat:thereisageneraldiscussionofwhymarketinterventionleadstodeadweightloss,followedbythepresentationofanimportantpolicyexample.Eachsectionisdiscussedinonereviewquestionandappliedinatleastoneexercise.Exercise(1)focusesonminimumwagespresentedinSection9.3.Exercises(4)and(5)reinforcediscussionofpricesupportsandproductionquotasfromSection9.4.Theuseoftariffsandquotas,presentedinSection9.5,canbefoundinExercises(3),(6),(7),(8),(11),and(12).Taxesandsubsidies(Section9.6)arediscussedinExercises(2),(9),and(14).Exercise(10)reviewsnaturalgaspricecontrolsinExample9.1,acontinuationofExample2.7.Exercise(4)maybecomparedtoExample9.4anddiscussedasanextensionofExample2.2.REVIEWQUESTIONS1.Whatismeantbydeadweightloss?Whydoesapriceceilingusuallyresultinadeadweightloss?Deadweightlossreferstothebenefitslosttoeitherconsumersorproducerswhenmarketsdonotoperateefficiently.Thetermdeadweightdenotesthatthesearebenefitsunavailabletoanyparty.Apriceceilingwilltendtoresultinadeadweightlossbecauseatanypricebelowthemarketequilibriumprice,quantitysuppliedwillbebelowthemarketequilibriumquantitysupplied,resultinginalossofsurplustoproducers.Consumerswillpurchaselessthanthemarketequilibriumquantity,resultinginalossofsurplustoconsumers.Consumerswillalsopurchaselessthanthequantitytheydemandatthepricesetbytheceiling.Thesurpluslostbyconsumersandproducersisnotcapturedbyeithergroup,andsurplusnotcapturedbymarketparticipantsisdeadweightloss.2.Supposethesupplycurveforagoodiscompletelyinelastic.Ifthegovernmentimposedapriceceilingbelowthemarket-clearinglevel,wouldadeadweightlossresult?Explain.Whenthesupplycurveiscompletelyinelastic,theimpositionofaneffectivepriceceilingtransfersalllossinproducersurplustoconsumers.Consumersurplusincreasesbythedifferencebetweenthemarket-clearingpriceandthepriceceilingtimesthemarket-clearingquantity.Consumerscapturealldecreasesintotalrevenue.Therefore,nodeadweightlossoccurs.3.Howcanapriceceilingmakeconsumersbetteroff?Underwhatconditionsmightitmakethemworseoff?Ifthesupplycurveisperfectlyinelasticapriceceilingwillincreaseconsumersurplus.Ifthedemandcurveisinelastic,pricecontrolsmayresultinanetlossofconsumersurplusbecauseconsumerswillingtopayahigherpriceareunabletopurchasetheprice-controlledgoodorservice.Thelossofconsumersurplusisgreaterthanthetransferofproducersurplustoconsumers.Ifdemandiselastic(andsupplyisrelativelyinelastic)consumersintheaggregatewillenjoyanincreaseinconsumersurplus.4.Supposethegovernmentregulatesthepriceofagoodtobenolowerthansomeminimumlevel.Cansuchaminimumpricemakeproducersasawholeworseoff?Explain.Becauseahigherpriceincreasesrevenueanddecr...
