Econ 5103 Submission Question 3

...

Now at the new market equilibrium point E’, producer surplus becomes the area BP1E’, and the producer surplus increased by the area P0P1E’E. Meanwhile, the effect of subsidies in this condition is just like the condition in Question(b). Although the new market equilibrium price is P1, the actual price the renters have to pay by themselves is Pp at point O, because the households who rent get subsidies from the government. The interval from Pp to P1 could be regarded as the per-unit subsidy. Now the new consumer surplus becomes the area APpO, and it increases by the area PpP0EO. The rectangular area PpP1E’O is the total cost of subsidies granted by the government. Corresponding to this condition, a deadweight loss of area EOE’ is created by this policy.

(d)Increasing Government Construction

[pic 4]In policy (d), the government constructs more rental properties for those renters. As analysis illustrated in the diagram above, in this case, the supply curve will shift out because now we have more quantities supplied. The new market equilibrium quantity becomes Q1, and the market equilibrium price becomes P1. The consumer surplus at the original market equilibrium is the area AP0E, and the producer surplus is the area BP0E. When the market equilibrium moves to point E’, the consumer surplus becomes the area AP1E’, and the producer surplus becomes the area P1CE’.

From the graph, we can see the increase in consumer surplus which is the area P0P1E’E. However, we should depend on the graphs of the supply and demand curve to see whether the producer surplus has increased or not. Overall this policy doesn’t create a deadweight loss.

(e) Increasing the Tax Concession

[pic 5]The last policy (e) is to implement a tax concession, which is cutting taxes on the investor’s expenditure of rental properties. As analysis illustrated in the diagram above, this policy also encourages the investors to increase the supply of rental properties, which again shits out the supply curve. The market equilibrium quantity increases from Q0 to Q1, and the market equilibrium price decreases from P0 to P1. The original consumer surplus is the area AP0E, but now it shown by the area AP1E’. Thus, the increase in consumer surplus is the area P0EE’P1. The market equilibrium price now for the producers is P1, however due to the tax concession, the actual price producers can get is Pp at point O. The reason is that producers are paying less on the rental properties. The interval between Pp and P1 is the per-unit tax concession. In addition, the government has to endure the cost of cutting taxes, which represented by the rectangular area PpOE’P1. In this case, a deadweight loss of the triangular area OEE’ is created again.

Conclusion and Recommendation

In conclusion, all policies above except policy(d) lead to a social welfare loss. According to policy (d), we are not sure whether the producer surplus increased or not. If it decreased more than the increase in consumer surplus, then we will have a loss in total social welfare. As to other four policies, there are definitely deadweight loss incurred, which means there is useless loss existing in the process of control and adjustment of the price and quantity by the government.

Reference

(1) Stegman, T. 2013, Uncertainty and asymmetric information, lecture notes distributed in the unit Market Failure at Central Lecture Block at University of New South Wales, Kingsford on 22 April, 2013.

(2) C.Bajada . J.Jackson , R. McIver, E.Wilson Economic Principles McGraw -Hill Education, 2012 (3 rd Edition) referred to as (BJMW).

(3) Bernanke,Olekalns,Frank Principles of Macro Economics: Mcgraw Hill 3 rd ,4 th eds