4 Interfering in the

Market
What are the
consequences of
interfering in a market?

DAMIEN KING
University of the West Indies, Jamaica
Does it matter which side of a transaction
is taxed?
Can a tax on a producer be passed on to
consumers?

In what sense are taxes bad?

Why are American lawyers the highest

paid in the world?

2
 The Effect of a Tax on a Market
Outline
Price Ceilings and Price Floors

Quantitative Restrictions

3
4.1 The Effect of a
Tax on a Market
How does a tax affect the
price, quantity, and
welfare in a market?

DAMIEN KING
University of the West Indies, Jamaica 4
 Can a tax on a

?
producer be “passed
on” to the consumer?

5
Suppose a
tax is
imposed
on sugary
drinks.

6
 200 –
190 –
P Where is QD
180 –
170 –
What 160 –
and QS equal
buyers 150 –
140 –
pay 130 – Supply
such that there
120 – is a $50 gap
Tax
110 –
100 –
What 90 –
80 –
between what
sellers 70 –
get 60 – buyer pays and
Demand
seller
50 –
40 –
Tax = $50 30 –
20 –
10 –
0–
Q receives?

7
 P We haven’t yet
stated who is
$135
Supply
being taxed.
Buyer’s share
$100
Seller’s share $85

Demand

Q
8
The incidence of a tax
is independent of the
target of a tax.

9
 P Market
Supply

e l le r
axed
i s t The Target
s
$135
If Producers’
Supply of the Tax:

$50
$50
$100
Taxing the
$85
Demand Producer

Q
10
 P
The Target
$135 Supply of the Tax:
$50
$100
Taxing the
$85 Consumers’
Demand Consumer
$50
If
bu
ye
ri
st Market
ax
ed
Q
Demand

11
So whether the supplier
or the buyer is taxed
determines only the
price on the sticker, but
does not affect what is
paid or received.
12
 P
So, what
Supply does
Buyer’s share
determine
the
Seller’s share
Demand

incidence
Q of a tax?

13
 P Supply
What
Determines
Buyer’s share
Demand the
Incidence
Seller’s share

of a Tax?
Q
14
Can a tax always be
passed on? If the
demand curve is
relatively flat, then no,
the buyers would rather
flee the product.
15
Economists don’t like
taxes, but not for the
same reasons you don’t
like them.

16
P
Dead- The Welfare
Consumer
Surplus
weight
Loss
Supply Effect of
Taxation
Government
Revenue

Producer
Surplus

Q
Demand

17
The incidence of a tax
is independent of the
entity upon which it is
levied.

18
“GIVE SOMETHING
BACK TO THE
COMMUNITY? THE
COMMUNITY
ALREADY TAKES
43.75% OF MY PAY.
TELL THE
COMMUNITY TO
GIVE SOMETHING
BACK TO ME.”

19
4.2 Price Ceilings
and Price Floors
How does a restriction on
price affect a market?

DAMIEN KING
University of the West Indies, Jamaica 20
 Price Ceiling
An upper limit, above which
price cannot rise

21
 Demand

Price
Supply

Price
Ceiling

Ceiling

Market
shrinks
Quantity
Excess Demand
22
23
Consequence Illegal market
: Market tries Bundling
to reassert
itself Quality reduction

24
Venezuela
: 2020

25
 Price Floor
A lower limit, below which
price cannot fall

26
 Demand

Price
Supply

Floor
Price
Floor

Market
shrinks
Quantity
Excess Supply
27
Consequence Illegal market
: Market tries Giveaways
to reassert
itself Quality increases

28
 March 2, 2018

Scotland sets a minimum price for alcohol

It may have unexpected effects

On February 26th the government of Scotland

set a minimum price for alcohol of 50p per unit.
The policy is likely to sober up some of the
heaviest drinkers. Surprisingly, it may also give
some drinks firms and retailers reason to
celebrate. The policy may mean higher profits
for some of them.
Demand for booze tends to be inelastic with
respect to price, suggesting that the hit to
revenues caused by the expected fall in
consumption will be more than outweighed by
the rise in prices.
29
 Demand

Price
Supply
Consume
r Surplus Floor The
Welfare
Some
Scottish
drinks
Cost of
suppliers’
reason to
Price
celebrate
Producer Ceiling Restriction
s
Surplus

Quantity

30
31
 Demand Supply

Wage

Minimu
m Wage

Employment
Unemployment
32
 Demand Supply

Wage
Minimu
m Wage

Employment
Unemployment
33
The empirical evidence
to support minimum
wages creating
significant
unemployment is
ambiguous.
34
Price controls also
interfere with the role of
prices in signalling to
consumers and
producers how best to
allocate scarce resources.
35
Price controls contract
the market and create
deadweight losses.

36
4.3 Quantitative
Restrictions
How do restrictions on the
amounts that can be
bought or sold affect a
market?

DAMIEN KING
University of the West Indies, Jamaica 37
 Demand QR

Price
Supply

Supply
Restriction
s

Quantity
Better offWorse off
38
London’
s Green
Belt

39
New
York’
s
taxis

40
Barriers to entry in the legal profession

Not enough lawyers?

Lawyers keep their numbers carefully
pruned, pushing up costs
Sep 3rd 2011 | NEW YORK | from the print edition

Clifford Winston and Robert Crandall of the Brookings

Institution and Vikram Maheshri of the University of Houston
published a book last month arguing that barriers to entry have
kept the number of lawyers artificially low for decades. This
results in an unearned premium on legal wages.
Three supply barriers bulk largest. The American Bar
Association accredits law schools, and in most states you must
be a graduate of one of them to practise law. The second hurdle
for a would-be lawyer is the bar exam. Finally, American states
do not allow non-lawyers to manage or invest in law firms, nor
can companies not run by lawyers practise law in any form.
In 2000 the average American law-firm lawyer made $191,000.
The average salary for all lawyers in Canada in 2002 was just
$64,000; in Australia in 2000 it was $90,000.
 Demand QR

Salary
Supply

$191k Lawyer’s
Fees in
$64k
the USA
vs
Canada
Quantity

42
 Demand QR

Price
Supply

Demand
Restriction
s

Quantity
Better offWorse off
43
 Deadweight losses
Problems
with All Enforcement costs
Market
Interference Favouritism and corruption

s Misallocation of resources

44
Quantitative restrictions
may be justified under
many circumstances,
but the justification has
to outweigh the
detrimental effects.
45
Quantitative
restrictions contract the
market and create
deadweight losses.

46