MARKETS WELFARE AND ECONOMICS OF

THE PUBLIC SECTOR

•Consumer, Producer and Efficiency of Markets

•The costs of Taxation
•Application: International Trade
•Externalities
•Public Goods and Common Resources
•The Design of the Tax System
ILOS:

After this module, you will be able to:

1. Identify the different concept related to Market
Efficiency.
2. Calculate Consumer Surplus, Producer Surplus, Social
Welfare and Deadweight Loss and interpret the results.
3. Reflect on how government intervention affects market
efficiency
4. Work as a group to solve case problems regarding
deadweight on government Intervention.
WELFARE ECONOMICS
 Study of how the allocation or resources affect
economic well-being
 To know if the allocated recources are efficient,
we need to measure the benefits that the
consumers and producers received when they
participate in the market.
 This topic will tell you that “ Equilibrium of
supply and demand in the market maximizes the
total benefits received by buyers and sellers”
CONSUMERS SURPLUS
 Benefits received by the buyer from participating in
market
 Consumer Surplus = Willingness to Pay – Actually Paid
 Willingness to pay- maximum amount that a buyer will
pay for good (how much the buyer values the good)
 If Price < Willingness to Pay= Buy
 If Price > Willingness to Pay= Reject
 If Price = Willingness to Pay= Undecided
CONSUMER SURPLUS (MARGINAL BUYER)
Horizontal Curve means?
Vertical Curve means?
CONSUMER SURPLUS (CHANGE IN CS)
HOW A LOWER PRICE RAISES CONSUMER SURPLUS
Is consumer surplus a
good measure
of economic well-being?
Does large consumer
Surplus means Good in
all cases?
PRODUCERS SURPLUS
 Benefits sellers receive from participating in the market
 Producers Surplus=(Amount seller is paid–Cost of
production)
 If Price < Willingness to produce = Reject
 If Price > Willingness to produce = Produce
 If Price = Willingness to produce = Undecided
PRODUCERS SURPLUS (MARGINAL SELLER)
PRODUCERS SURPLUS (CHANGE IN PS)
HOW A HIGHER PRICE RAISES PRODUCERS SURPLUS
MARKET EFFICIENCY
 Efficiency- the property of a resource allocation of
maximizing the total surplus received by all members of
society
 Total Surplus = Consumer Suplus + Producer Surplus
 Total Surplus = Willingness to pay – Cost of production
 Equality- uniformly distributing economic prosperity
among members of society
EVALUATING MARKET EQUILIBRIUM
ECONOMIC WELL-BEING CAN NOT BE RAISED BY CHANGING
THE QUANTITY OF GOOD
MARKET EFFICIENCY AND MARKET FAILURE

 We concluded that market is efficient through the

use of assumptions but what if come of these
assumptions changed
1. Perfectly Competitive Market
2. Buyers and Sellers only
 Market Power and Externalities will lead to
MARKET FAILURE
ECONOMIC WELFARE
DEADWEIGHT LOSS OF TAXATION
 When supply and demand is not on equilibrium
and it causes inefficiency
HOW A TAX AFFECTS MARKET PARTICIPANTS

 Participants are buyers, sellers and government

WELFARE WITH AND WITHOUT TAX
DEADWEIGHT LOSSES AND THE GAIN FROM TRADE

 Losses of buyers and sellers > Tax Revenue

 Change the Total Surplus or welfare of the society
 Taxes cause DWL because they prevent buyers and
sellers from realizing some of the gains from trade
 Instead of taking the trade and leave without gain,
buyers and sellers cancel trade making them receive
no gain and no tax revenue for the government
DETERMINANTS OF WEIGHTLOSS
 Elasticity
DETERMINANTS OF ELASTICITY
 Size of Tax
SUPPLY-SIDE ECONOMICS
 Lowering the Tax can raise the Tax Revenue
DETERMINANTS OF TRADE
 World Price
 If World Price > Domestic Price = Export
 If World Price < Domestic Price = Import
 Small Economy Assumption
 Price Takers- countries with small economy take the
world price as given
GAINS AND LOSSES OF EXPORTING COUNTRY
GAINS OR LOSSES OF IMPORTING COUNTRY
EFFECT OF TARIFF
 Tariff is a tax imposed to imported goods. This
would only be relevant for importing countries.
OTHER BENEFITS OF INTERNATIONAL TRADE

 Increased variety of good

 Lower cost throught economies of scale
 The more goods produces, the lower the cost incurred
 Increased competition
 Enhanced flow of ideas
EXTERNALITIES
 Uncompensated impact of one person’s actions
on the well-being of a bystander
 Negative Externality- adverse effect
 Positive Externality- beneficial
NEGATIVE EXTERNALITIES
POSITIVE EXTERNALITY
TECHNOLOGY SPILL OVER, INDUSTRIAL POLICY AND PATENT
PROTECTION

 Technology Spill over- impact of one firm’s

research and production efforts on other firm’s
access to technology advance
 Industrial Policy- government intervention in the
economy that aims to promote technology-
enhancing industries
 Patent Protection- giving the firm property right
over their inventions
PUBLIC POLICIES TOWARD EXTERNALITIES
 Command and Control Policies
 Market Based Policy
 Corrective Taxes and Subsidies
 Tradable Pollution Permits
PRIVATE SOLUTIONS TO EXTERNALITIES
 Moral codes and Social Sunctions
 Charities
 Coase Theorem
CHARACTERISTICS OF GOODS
 Excludable- a peson can be prevented from using
the good
 Rival in consumption- one person’s use
diminishes other people’s use
DIFFERENT KINDS OF GOODS
PUBLIC GOODS
 Free Rider- person who receives the benefit
without paying for it
 Government provides public goods because
private market won’t produce it due to free riders
 National Defense
 Basic Knowledge
COST-BENEFIT ANALYSIS
 Study that compares the costs and benefits to
society of providing a public goods
 How much are willing to pay for it?
 How much are they willing to sell?
COMMON RESOURCES
 This goods results to negative externalities
 Congested Roads
 Fish, Whales and other wildlife (Cow and
Elephant)