Impact of subsidies, quotas and market for illegal goods

Subsidies
Government pays to producer => producer supply more than the efficient quantity

Quota
Legal limit on the quantity of goods => producer supply less than the efficient quantity

Illegal goods
Illegal goods shift the demand curve downward by the expected value of penalty incurred for buyer and shift the supply curve upward by the expected value of penalty incurred by seller.

Impact of taxes and Deadweight loss

Statutuory Incidence of Tax
Refer to the tax obligation as stated by law, either on the byer or the seller.

Actual Incidence of Tax
Refer to the actual burden imposed by the tax upon buyers (who pay higher prices) and sellers (who receive less money).

Deadweight loss
Deadweight loss is resulted as less than efficient quantity of goods is produced and consumed.

How the legal burden of paying taxes is split between buyers and sellers?
Actual incidence of tax may differ from statutory incidence . Tax incidence is independent of whether imposing tax on consumption or production but depends on their elasticity.

• If the demand curve is relatively inelastic, the tax burden will mostly fall on buyers.
• If the supply curve is relatively inelastic, the tax burden will mostly fall on sellers.

Black market vs market efficiency

Market efficiency may be said to occur when an action creates more benefits than costs. Legal systems help economic systems become more efficient by reducing risks to economics participants. Risk represents a cost that must be compensated for by higher charges.

Participants in a "black market system" face a higher risk in their transaction, e.g. theft and violence.

Price ceiling vs. Price Floor

Price ceiling
In a competitive market, the market price is the quilibrium price (P_E) at which the quantity demanded equals to the quantity supplied.

If Pceiling greater than P_E -> no effect
If Pceiling smaller than P_E ->quantity demanded > quantity supplied, i.e. shortgage created

The shortage will result in

• Long queue of buyers
• Discrimination by sellers, e.g. provide goods only to family and friends
• Bribes to sellers, some pay extra under the table
• Reduced quanlity of the goods
• Black markets

Price floor
The minimun price for a good or service.

If Pfloor smaller than P_E -> no effect
If Pfloor greater than P_E -> quantity supplied > quantity demanded, i.e. surplus resulted -> market inefficiency

Effect of minimum wage

• If minimum wage is set below the equilibirm market wage for low-skilled workers, then below will be resulted:
  - Increase in unemployment rate
  - Decrease in non-monetary benefits for workers
  - Firms substitue more than the efficient amount of capital of labour

Long-term and short-term impacts of outside shocks

In short run:
Decrease housing supply => ­increase rent

In long run:
Increase­ rent => ­ increase housing supply (rebuilding) => decrease rent

Note:

• Supply is more elastic in long run than in short run.