2000 1960 2010 1930 Overview of Welfare Economics
- Slides: 65
2000 1960 2010 1930
Overview of Welfare Economics • • Pareto Efficiency Supply & Demand Market Equilibrium Marginal Costs & Marginal Benefits Market Failure Externalities Public Goods Common Resources
“A planner’s primary obligation is to serve the public interest. ” - AICP Code of Ethics and Professional Conduct
Welfare Economics: The study of how different forms of economic activity and different methods of allocating scarce resources affect the well-being of individuals or communities Pareto Efficiency: An allocation of resources is considered Pareto efficient if no alternative allocation can make at least one person better off without making someone else worse off
Supply & Demand Marginal Cost & Marginal Benefit
Demand (Benefit to Consumers or Society) The relationship between the price of a good/service and the quantity purchased by consumers Law of Demand: All else being equal, quantity demanded decreases as price increases. (The number of people whose benefit exceeds the price decreases as price increases) (Negative relationship between price and quantity = downward slope)
Demand
Supply (Cost to Producers or Society) The relationship between the price of a good/service and the quantity that producers are willing to supply Law of Supply: All else being equal, quantity produced increases as price increases. (The number of producers whose cost is lower than the price increases as price increases) (Positive relationship between price and quantity = upward slope)
Supply
Supply and Demand
MB
Social Surplus Consumer Surplus: The difference between what consumers are willing-to-pay and what they have to pay Graphically, the area under the demand curve and above the price Producer Surplus: The difference between producers’ total revenue and marginal cost Graphically, the are above the supply curve (MC) and below the price
Consumer Surplus
Producer Surplus
Social Surplus Consumer Surplus: The difference between what consumers are willing-to-pay and what they have to pay Graphically, the area under the demand curve and above the price Producer Surplus: The difference between producers’ total revenue and marginal cost Graphically, the are above the supply curve (MC) and below the price
Social Surplus
Realities of the Market The private market only ensures efficiency under strict conditions, including: w w w Many buyers and sellers (no monopolies) Identical goods and services Perfect information No barriers to entry No externalities (side effects) w … Even a “perfectly competitive” private market: w w cannot effectively allocate public goods or common resources Does not address issues of distribution or equity…
“Four Vital Functions of Planning” (Klosterman, 1985) Argument for and Against Planning 1. Improves information for public and private decision making 2. Considers external effects of individual and group action 3. Promotes collective interest, esp. w/ respect to public goods 4. Considers distributional effects of market actions (equity)
Zero Economic Profit? A firm that earns zero economic profit is said to earn “normal profits” Two ways to measure profit: 1. Economic Profit = Total Rev. – (Explicit Costs + Implicit Costs) 2. Accounting Profit = Total Rev. – (Explicit Costs) w w w Explicit Costs include: capital, labor, etc. (actual $ payments) Implicit Costs include: the value of resources used in production for which no monetary payments are made (opportunity costs) e. g. , implicit cost to the farmer is salary he could have made had he chosen another pursuit) A firm that just covers its operating costs and its implicit costs makes ZERO economic profit, but still makes an accounting profit
Monopolist’s Marginal Revenue
Monopolist’s Marginal Revenue D
Market Failure Externalities: Economic side effects or “spillovers. ” costs or benefits that stem from an economic activity, but that affect people other than those directly involved in a market transaction. Can be POSITIVE or NEGATIVE
Market Failure Example of negative externality Driving involves direct cost: gas, driver’s time …and creates indirect, or external, costs: pollution, congestion, road maintenance, etc. The individual driver does not bear the indirect costs, and does not consider them in his/her decisionmaking process
Market Failure Example of positive externality: A beekeeper’s bees create benefits that can be captured: honey, sold to customers … and external benefits that cannot be captured: bees pollinate nearby orchards The orchard farmers do not pay the beekeeper for this benefit, so the beekeeper does not consider it in his decision-making process
Figure 2 Pollution and the Social Optimum Price of Aluminum Social cost Cost of pollution Supply (private cost) Optimum Equilibrium Demand (private value) 0 QOPTIMUM QMARKET Quantity of Aluminum Copyright © 2004 South-Western
Figure 3 Education and the Social Optimum Price of Education Supply (private cost) Social value Demand (private value) 0 QMARKET QOPTIMUM Quantity of Education Copyright © 2004 South-Western
Market Failure Public Goods: Defined by non-rivalrous consumption and non-excludability w Non-rivalrous consumption: Good or service can be used by one person without detracting from the ability of other to use it w Non-excludability: Impossible or impractical to exclude some people from enjoying the benefits of a good service, even if they are unwilling to pay for it
Topics w Budgets § especially revenue sources, – Especially taxes w Guidelines for Evaluating Taxes w Equity: Progressive / Regressive Taxes w The Tax Wedge, Elasticity, and Incidence
Guidelines for Evaluating Taxes Ease of Administration Equity 1. Ability to pay (progressivity vs. regressivity) 2. Benefit principle of taxation Efficiency 1. Effect on social surplus (welfare) 2. Ability to raise revenue
Tax Equity Progressive: Burden of tax increases w/ income. Higher inc households spend a greater percentage of their income on the tax than lower income households. Regressive: Burden of tax decreases w/ income. Higher inc households spend a smaller percentage of their income on the tax than lower income households Proportionate: Burden of the tax remains the same over all levels of income
The Efficiency Effects of a Tax Price Supply Price buyers pay Size of tax Price without tax Price sellers receive Demand 0 Quantity with tax Quantity without tax Quantity Copyright © 2004 South-Western
The Effects of a Tax Levied on Sellers Price P* + t Size of tax Supply (MC ) P* Demand 0 Q* Quantity Copyright © 2004 South-Western
The Effects of a Tax Levied on Sellers Price Supply (MC Price buyers pay Size of tax ) Price without tax Price sellers receive Demand (MB) 0 Quantity with tax Quantity without tax Quantity Copyright © 2004 South-Western
The Effects of a Tax Levied on Buyers Price Supply (MC ) P* Size of tax P* - t Demand 0 Q* Quantity Copyright © 2004 South-Western
The Effects of a Tax Levied on Buyers Price Supply (MC Price buyers pay ) Size of tax Price without tax Price sellers receive Demand 0 Quantity with tax Quantity without tax Demand (MB) Quantity Copyright © 2004 South-Western
The Efficiency Effects of a Tax Price Supply (MC Price buyers pay Size of tax ) Price without tax Price sellers receive Demand 0 Quantity with tax Quantity without tax Quantity Copyright © 2004 South-Western
Tax Incidence The party that actually pays the tax to the government (whether that is the seller or buyer) can pass part of that tax forward to consumer, or backward to the producer. The party that the tax is shifted to bears the tax incidence The incidence depends on price elasticity of supply and demand
Elasticity The incidence of taxation, the amount of deadweight loss caused by a tax, and the amount of revenue raised by a tax all depend on how responsive the quantity supplied and quantity demanded are to changes in price
The Efficiency Effects of a Tax Price Supply (MC Price buyers pay Size of tax ) Price without tax Price sellers receive Demand 0 Quantity with tax Quantity without tax Quantity Copyright © 2004 South-Western
The Efficiency Effects of a Tax Price MC Size of tax 2. 50 Size of tax Supply (MC ) 2. 00 1. 50 Demand 0 Quantity Copyright © 2004 South-Western
Tax Incidence and Elasticities Inelastic Demand Price Supply 2. 75 Size of tax 2. 00 1. 75 Demand 0 Quantity Copyright © 2004 South-Western
Tax Incidence and Elasticities Elastic Demand Price Supply 2. 25 2. 00 Size of tax Demand 1. 25 0 Quantity Copyright © 2004 South-Western
Tax Incidence and Elasticities Inelastic Supply Price Supply Size of tax Demand 0 Quantity Copyright © 2004 South-Western
Tax Incidence and Elasticities Elastic Supply Price Size of tax Supply Demand 0 Quantity Copyright © 2004 South-Western
Tax Distortions and Elasticities (c) Inelastic Demand Price Supply Size of tax When demand is relatively inelastic, the deadweight loss of a tax is small. Demand 0 Quantity Copyright © 2004 South-Western
Tax Distortions and Elasticities (d) Elastic Demand Price Supply Size of tax Demand When demand is relatively elastic, the deadweight loss of a tax is large. 0 Quantity Copyright © 2004 South-Western
Tax Distortions and Elasticities (a) Inelastic Supply Price Supply When supply is relatively inelastic, the deadweight loss of a tax is small. Size of tax Demand 0 Quantity Copyright © 2004 South-Western
Tax Distortions and Elasticities (b) Elastic Supply Price When supply is relatively elastic, the deadweight loss of a tax is large. Size of tax Supply Demand 0 Quantity Copyright © 2004 South-Western
Corrective Tax (negative externalities) (Social MC) Price Size of tax Supply (Pvt MC) P* P Demand (MB) 0 Q* Q Quantity Copyright © 2004 South-Western
The Effects of a Tax on Social Surplus Price Supply Price without tax Demand 0 Quantity without tax Quantity Copyright © 2004 South-Western
The Effects of a Tax on Social Surplus Price Supply Price buyers pay Size of tax (T) Tax revenue (T × Q) Price sellers receive Demand 0 Quantity with tax Quantity without tax Quantity Copyright © 2004 South-Western
Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes (a) Small Tax Price Deadweight loss Supply PB Tax revenue PS Demand 0 Q 2 Q 1 Quantity Copyright © 2004 South-Western
Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes (b) Medium Tax Price Deadweight loss PB Supply Tax revenue PS 0 Demand Q 2 Q 1 Quantity Copyright © 2004 South-Western
Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes (c) Large Tax Price PB Tax revenue Deadweight loss Supply Demand PS 0 Q 2 Q 1 Quantity Copyright © 2004 South-Western
Sprawl Traits 1. 2. 3. 4. 5. 6. 7. Unlimited outward extension of development Low-density residential/comm. development Widespread strip commercial Leapfrog development Auto dependence (private auto) Segregation of land uses by zones Reliance on trickle down or filtering process to provide housing to low income HH 8. Lack of centralized control of land uses 9. Fragmentation of power over land use (many localities) 10. Great fiscal disparity among localities Burchell, Robert. (1998) The Costs of Sprawl – Revisited. Transportation Cooperative Research Program Report 39. Washington, DC: National Academy Press.
- 2010-1930
- Objectives of welfare economics
- Conclusion of social welfare
- Father of welfare economics
- Welfare economics examples
- 1970 1980 1990
- Perbedaan incoterms 2000 dan 2010
- Mathematical economics vs non mathematical economics
- Maastricht university school of business and economics
- Funding loan
- 1930 computers
- Teoria de vigotsky
- 1930 pop culture
- Feminist naacp leader 1930-1950
- Becker 1930
- Kaj je ekspresionizem
- Maycomb alabama 1930
- M.c. escher castrovalva (1930)
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- Sale of goods act 1930 introduction
- Futsal brief history
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- Expansionismo estadounidense de 1900 a 1930
- คืออะไร
- 1930-1939 fashion
- El puerto rico americano adaptacion y resistencia
- 1920 moda
- 2007-1930
- Maharashtra districts in 1960
- Sperling 1960 sensory memory
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- 1960s food trends
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- Coase 1960 the problem of social cost
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