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Institut für AgribusinessInstitut für Agrarpolitik und Marktforschung
Hannover 14.11.07.ppt
Prof. Dr. Dr. h.c. P. Michael Schmitz Giessen University
Tashkent; July 2014
Lecture in the frame of the SAMUz project
Empirical Research Methods
www.samuz.org
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Hannover 14.11.07.ppt
Part I
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Hannover 14.11.07.ppt
1. Definition
2. Principles of applied welfare economics
a) Welfare measurement for individuals
b) Aggregated welfare measurement
3. Welfare measurement in a closed economy
a) without state intervention: technological progress
increase of real income
b) with state intervention: taxes/subsidies
4. Welfare measurement in an open economy
Cost – Benefit AnalysisOutline
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Government must make decisions regarding the adoption of public policies and projects.
The branch of economics that deals with how to evaluate proposed policies/projects is known as cost-benefit-analysis or applied welfare economics
Cost-benefit analysis-what is it about?-
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Cost-Benefit-Analysis or Applied Welfare Economics
ObjectiveHow to use resources optimally to achieve the maximum well-being for the individualls in society
or more simplyto help society make better choices
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Principles of applied welfare economics I
• “Welfare economics is the study of how the allocation of resources affects economic well-being” (Mankiw, 2004, p. 138).
• Assumptions: - welfare increases with an increase of the consumtion
- the social welfare is the sum of the welfare of all individuals
- utility can be measured cardinally and the utility of individuals can be
compared
- allocation of resources depends on the followed policy
- consumer sovereignty
- partial analysis
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Principles of applied welfare economics- Starting points -
• perfect competition• no external effects• Kaldor-Hicks criterion (compensation test):
„State B is preferred to state A if at least one individual is made better off without making anyone worse off – not that all individuals are actually worse off – by some feasible redistribution (compensation) following the change. (Just et al., 2004, p. 32)
• the Pareto criterion is not used („if it is possible to make at least one person better off when moving from state A to state B without making anyone worse off, state B is ranked higher by society than state A“ Just et al., 2004, p. 15)
• a reference system is used
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• utility is difficult to be observed and to be measured
• approximation for the measurement of utility: monetary units
• but: income and consumption decisions at various prices are observed and based on that money-based measurements of welfare effects are measured (Just et al., 2004, p. 98) !!!!!!
Welfare measurement of a single consumer I
Conditions:
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Four possible Buyers’ Willingness to pay
Buyer Willingness to Pay(€)
JohnPaulGeorgeRingo
100 80 70 50
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The Demand Curve
Price ofAlbum (€)
0 Quantity of Albums
Demand
1 2 3 4
80 Willingness to pay Paul
70 Willingness to pay George
50 Willingness to pay Ringo
Willingness to pay John100
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Measuring Consumer Surplus with the Demand Curve
(a) Price = € 80Price of Album
(€)
50
70
80
0
100
Demand
1 2 3 4Quantity of albums
John’s Consumer Surplus(€ 20)
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Measuring Consumer Surplus with the Demand Curve
(b) Price = € 70Price of Album
(€)
50
70
80
0
100
Demand
1 2 3 4
Total Consumer Surplus (€ 40)
Quantity of Albums
Consumer Surplus John(€ 30)
Consumer SurplusPaul (€ 10)
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Quantity
Consumer Surplus at different PricesPrice
0
Demand
A
BCP1
Q1
P2
Q2
Consumer Surplus to New Consumers
Additional Consumer Surplus to Initial Consumers
Initial Consumer Surplus
D EF
How the Price Affects Consumer Surplus
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Welfare measurement of a single consumer II
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Welfare measurement of a single consumer II
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Welfare measurement of a single consumer II
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Welfare measurement of a single consumer II
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Welfare measurement of a single consumer II
• Consumer surplus equals buyers’ willingness to pay for a good minus the amount they actually pay for it.
• Consumer surplus measures the benefit buyers get from participating in a market.
• Consumer surplus can be computed by finding the area below the demand curve and above the price.
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Production Costs of Four Possible Sellers
Seller Cost (€)
Maria 900
Luise 800
Georgine 600
Grandmother 500
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The Supply Schedule
Price (€)
Sellers Quantity supplied
900 Maria, Luise, Georgine, Grandmother 4
800–900 Luise, Georgine, Grandmother 3
600–800 Georgine, Grandmother 2
500–600 Grandmother 1
500 None 0
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The Supply Curve
Quantity
Price(€)
500
800
900
0
600
1 2 3 4
Supply
Maria‘s cost
Luise‘s cost
Georgine‘s cost
Grandmother’s cost
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Measuring Producer Surplus with the Supply Curve
Quantity
Price(€)
500
800
900
0
600
1 2 3 4
(a) Price = € 600
Grandmother’s producersurplus (€ 100)
’
Supply
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Measuring Producer Surplus with the Supply Curve
Quantity
Price(€)
500
800
900
0
600
1 2 3 4
(b) Price = € 800
Georgine’s producersurplus (€ 200)
Total producer surplus(€ 500)
Grandmother’s producersurplus (€ 300)
Supply
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How the Price Affects Producer Surplus
Quantity
(a) Producer Surplus at Price P1
Price
0
P1
Supply
BC
A
Q1
Producer Surplus
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How the Price Affects Producer Surplus
Quantity
(b) Producer Surplus at Price P2
Price
0
P1
BC
Supply
A
Initial producersurplus
Q1
P2
Q2
Producer surplusto new producers
Additional producer surplus to initial producers
D E F
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Welfare measurement of a single producer
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Hannover 14.11.07.ppt
Welfare measurement of a single producer
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Hannover 14.11.07.ppt
Welfare measurement of a single producer
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Welfare measurement of a single producer
• Producer surplus equals the amount sellers receive for their goods minus their costs of production.
• Producer surplus measures the benefit sellers get from participating in a market.
• Producer surplus can be computed by finding the area below the price and above the supply curve.
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Welfare measurement of a single producer and consumer
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Principles of applied welfare economics -aggregation over individuals-
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Principles of applied welfare economics -aggregation over individuals-
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Social Welfare-the surplus concept-
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Social Welfare-the willingness to pay concept-
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Social Welfare-the willingness to pay concept-
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Social Welfare-the willingness to pay concept-
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Social Welfare-the surplus and the willingness to pay concept-
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Social Welfare
Surplus conceptSurplus concept(indirect)
W = CS + PS
W welfareCS consumer’s surplusPS producer’s surplus
Willingness to Pay conceptWillingness to Pay concept(direct)
W = WtP – VC W = WtP – VC W WelfareWtP Willingness to Pay
(„Nutzen“)VC variable costs
Both concepts should give the same result!
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• With the help of consumer and producer surplus
we can answer the following question:– is the allocation of resources through the market
function somehow wished?
• The allocation of the resources is efficient when the maximum total surplus is achieved
Efficieny of the market equilibrium
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Hannover 14.11.07.pptCopyright©2003 Southwestern/Thomson Learning
Quantity
Price
0
Supply
Demand
Costto
sellers
Costto
sellers
Valueto
buyers
Valueto
buyers
Value to buyers is greaterthan cost to sellers.
Value to buyers is lessthan cost to sellers.
Equilibriumquantity
Figure 8 The Efficiency of the Equilibrium Quantity
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• With the help of consumer and producer surplus
we can answer the following question:– is the allocation of resources through the market
function somehow wished?
• The allocation of the resources is efficient when the maximum total surplus is achieved
Efficieny of the market equilibrium
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• Because the equilibrium outcome is an efficient allocation of resources, the social planner can leave the market outcome as he/she finds it.
• This policy of leaving well enough alone goes by the French expression laissez faire.
Evaluation of the market equilibrium
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• Three Insights Concerning Market Outcomes– Free markets allocate the supply of goods to the
buyers who value them most highly, as measured by their willingness to pay.
– Free markets allocate the demand for goods to the sellers who can produce them at least cost.
– Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
Market Efficiency
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Surplus conceptSurplus concept(indirect)
W = CS + PS + St
W welfareCS consumer’s surplusPS producer’s surplusSt Budget effects or
taxpayer’s effects
Willingness to Pay conceptWillingness to Pay concept(direct)
W = WtP – VC + (C)W = WtP – VC + (ER – IE) W WelfareWtP Willingness to Pay
(„Nutzen“)VC variable costs(C Net foreign currency refundER Export RefundIE Import Expenditure)
Both concepts should give the same result!
Social Welfare
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b
PS = + b + c CS = + a – b W = + a + c
WtP = +a+c+d+e-[ VC= +d+e ] W = +a+c
Welfare effects of income increase
quantity
price
supply
D0
D1
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CS = +a+b+c PS = –a +d+e W = +b+c+d+e
WtP = +c +e+f-[ VC= –b –d +f ] W =+b+c+d+ef
quantity
price
Welfare effects of technological progress
S1
S0
D
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The deadweight loss of taxation
- production tax as amount of tax per production unit-
P0
Producer i Market
quantity
price
tMCiSi=2q
QSiQSi,new
MCi newSi new =2q+t
tS0
S1
D
quantity
price
QS,DQS,D
mew
P0
PD
PS
a bc d
ΔCS=-a-bΔPS=-c-dΔSt=a+c ΔW=-b-d
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Hannover 14.11.07.pptCopyright © 2004 South-Western
Consumersurplus
Producersurplus
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Equilibriumprice
Equilibriumquantity
Figure 1The Equilibrium without International Trade
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• Equilibrium Without Trade – Results:
• Domestic price adjusts to balance demand and supply.• The sum of consumer and producer surplus measures
the total benefits that buyers and sellers receive.
The Equilibrium without international trade
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• Equilibrium Without Trade– Assume:
• A country is isolated from rest of the world and produces steel.
• The market for steel consists of the buyers and sellers in the country.
• No one in the country is allowed to import or export steel.
The determinants of trade
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• What determines whether a country imports or exports a good?
• Who gains and who loses from free trade among countries?
• What are the arguments that people use to advocate trade restrictions?
Determinants of trade
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• If the country decides to engage in international trade, will it be an importer or exporter?
The World Price and Comparative Advantage
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• The effects of free trade can be shown by comparing the domestic price of a good without trade and the world price of the good. The world price refers to the price that prevails in the world market for that good.
The World Price and Comparative Advantage
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• If a country has a comparative advantage, then the domestic price will be below the world price, and the country will be an exporter of the good.
The World Price and Comparative Advantage
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• If the country does not have a comparative advantage, then the domestic price will be higher than the world price, and the country will be an importer of the good.
The World Price and Comparative Advantage
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Hannover 14.11.07.pptCopyright © 2004 South-Western
Priceof Steel
0Quantityof Steel
Domesticsupply
Priceafter
trade Worldprice
DomesticdemandExports
Pricebeforetrade
Domesticquantity
demanded
Domesticquantitysupplied
Figure 2 International Trade in an Exporting Country
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Hannover 14.11.07.pptCopyright © 2004 South-Western
D
C
B
A
Priceof Steel
0 Quantityof Steel
DomesticsupplyPrice
aftertrade World
price
Domesticdemand
Exports
Pricebefore
trade
Figure 3 How Free Trade Affects Welfare in an Exporting Country
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Hannover 14.11.07.pptCopyright © 2004 South-Western
D
C
B
A
Priceof Steel
0 Quantityof Steel
DomesticsupplyPrice
aftertrade World
price
Domesticdemand
Exports
Pricebefore
trade
Producer surplusbefore trade
Consumer surplusbefore trade
Figure 3 How Free Trade Affects Welfare in an Exporting Country
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How Free Trade affects welfare in an exporting country
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• The analysis of an exporting country yields two conclusions:– Domestic producers of the good are better off, and
domestic consumers of the good are worse off.– Trade raises the economic well-being of the nation
as a whole.
The winners and losers from trade
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• International Trade in an Importing Country– If the world price of steel is lower than the
domestic price, the country will be an importer of steel when trade is permitted.
– Domestic consumers will want to buy steel at the lower world price.
– Domestic producers of steel will have to lower their output because the domestic price moves to the world price.
The gains and losses of an importing country
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Hannover 14.11.07.pptCopyright © 2004 South-Western
Priceof Steel
0 Quantity
Priceafter
trade
Worldprice
of Steel
Domesticsupply
DomesticdemandImports
Domesticquantitysupplied
Domesticquantity
demanded
Pricebeforetrade
Figure 4 International Trade in an Importing Country
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Hannover 14.11.07.pptCopyright © 2004 South-Western
C
B D
A
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Priceafter trade
Worldprice
Imports
Pricebefore trade
Figure 5 How Free Trade Affects Welfare in an Importing Country
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Hannover 14.11.07.pptCopyright © 2004 South-Western
C
B
A
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Priceafter trade
Worldprice
Pricebefore trade
Consumer surplusbefore trade
Producer surplusbefore trade
Figure 5 How Free Trade Affects Welfare in an Importing Country
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Hannover 14.11.07.pptCopyright © 2004 South-Western
C
B D
A
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Priceafter trade
Worldprice
Imports
Pricebefore trade
Producer surplusafter trade
Consumer surplusafter trade
Figure 5 How Free Trade Affects Welfare in an Importing Country
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How Free Trade affects welfare in an importing country
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• How Free Trade Affects Welfare in an Importing Country– The analysis of an importing country yields two
conclusions:• Domestic producers of the good are worse off, and
domestic consumers of the good are better off.• Trade raises the economic well-being of the nation as a
whole because the gains of consumers exceed the losses of producers.
The winners and losers from trade
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• The gains of the winners exceed the losses of the losers.
• The net change in total surplus is positive.
The winners and losers from trade
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• A tariff is a tax on goods produced abroad and sold domestically.
• Tariffs raise the price of imported goods above the world price by the amount of the tariff.
The effects of a tariff
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Sp
qD
pi
qwA qw
N
pw
qiNqi
A
a c db
qwM
qiM
The effects of an import tariff (small country)
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Sp
qD
pi
qwA qw
N
pw
qiNqi
A
PS = + a CS = – a – b – c – d St = + c W = – b – d
a c db
qwM
qiM
The effects of an import tariff (small country)
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Sp
qD
pi
qiD qi
S
pw
qwSqw
D
qiX
qwX
a c db
The effects of an export subsidy (small country)
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Sp
qD
pi
qiD qi
S
pw
qwSqw
D
qiX
qwX
PS = + a + b + c CS = – a – b St = - [b + c + d ] W = – b – d
a c db
The effects of an export subsidy (small country)
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Sp
qD
increase of variable costs
qiD qi
SqwD qw
S
pi
pw
decrease of Willingness to Pay
The effects of an export subsidy (small country)
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Sp
qD
increase of variable costs
increase of export refund
qiD qi
SqwD qw
S
pi
pw
decrease of Willingness to Pay
The effects of an export subsidy (small country)
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What happens if a country is a big one and applies a foreign trade policy?
1. Change of domestic price level due to import tariff and/or export subsidy
2. Change of imported/exported quantities (i.e. lower quantity is imported and more is exported
3. Increase of supply in the world markets
4. Decrease of world market prices!
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Why does the higher export supply decrease the world market price?
EA=Export Supply= (Exportangebot)
IN=Import Demand=(Importnachfrage)
Price
Quantity
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Welfare Effects of the guaranteed Price(Big exporting country)
Assumption: The higher export supply leads to the decrease of the world market price from
Pw to P`w ΔCS = -b-c ΔPS = b+c+d ΔST = -(c+d+e+g+h+i) ΔW = -c-e-g-h-i Allocation TOT Losses Losses
Price
Quantity
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Summary
• There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions.
• Economists, however, believe that free trade is usually the better policy.
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References used, suggested reading
Henrichsmeyer, W. and H. P. Witzke (1994). Agrarpolitik Band 2, Bewertung und Willensbildung. Stuttgart: Eugen Ulmer Verlag
Just, R. E., Hueth, D. L. and A. Schmitz (2004). The Welfare Economics of Public Policy, A Practical Approach to Project and Policy Evaluation. Edward Elgar Publishing.
Mankiw, N. G. (2004). Principles of Economics, 3rd Edition. Thomson South-Western.
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Part IIwww.samuz.org
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4. Recap - Welfare measurement in an open economy
5. External effects
a) negative externalities
b) positive externalities
6. Market power and rent seeking: monopoly7. Second best theory: a) monopoly and negative ext. effects
b) price support and unemployment
8. Welfare measurement of multiple price changes
9. Empirical examples of cost-benefit Analysis
Cost – Benefit AnalysisOutline
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D
p*
q*
CS = WtP – CE
Welfare measurement of a single consumer
Consumer surplus(CS)Consumer expenditure (CE)
quantity
price
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S
p*
q*
PS = PR – VC
quantity
price
Welfare measurement of a single producer
producer’s surplus (PS)
Variable Costs (VC)
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S
D
p*
q*
producer’s surplus
consumer’s surplus
quantity
price
Welfare measurement of single producers & consumers
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Surplus conceptSurplus concept(indirect)
W = CS + PS + St
W welfareCS consumer’s surplusPS producer’s surplusSt Budget effects or
taxpayer’s effects
Willingness to Pay conceptWillingness to Pay concept(direct)W = WtP – VC + (C)W = WtP – VC + (ER – IE) W WelfareWtP Willingness to PayVC variable costsC Net foreign currency refundER Export RefundIE Import Expenditure)
Both concepts should give the same result!
Social Welfare
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Exercise
Calculation of CS and PSGiven a demand function: XD = 12 - p and a supplyfunction: XS = 2 p
1. find p* and x * used in the demand or supply functions
2. calculate the consumer surplus (CS)3. calculate the produce surplus (PS) and the total
welfare
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Exercise Answer
CS = 0.5(pp - p *) x * CS = 0.5(12 - 4)8 = 32 PS = 0.5 (p * - pS) x * PS = 0.5 (3 - 0) 8 = 16
Total Welfare = CS+PS Total Welfare = 32+16= 48
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The deadweight loss of taxation
- production tax as amount of tax per production unit-
P0
Producer i Market
quantity
price
tMCiSi=2q
QSiQSi,new
MCi newSi new =2q+t
tS0
S1
D
quantity
price
QS,DQS,D
mew
P0
PD
PS
a bc d
ΔCS=-a-bΔPS=-c-dΔSt=a+c ΔW=-b-d
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C
B D
A
Priceof Steel
0 Quantityof Steel
Domesticsupply
Domesticdemand
Priceafter trade
Worldprice
Imports
Pricebefore trade
Figure 5 How Free Trade Affects Welfare in an Importing Country
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Sp
qD
pi
qwA qw
N
pw
qiNqi
A
PS = + a CS = – a – b – c – d St = + c W = – b – d
a c db
qwM
qiM
The effects of an import tariff (small country)
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Welfare Effects of the guaranteed Price(Big importing country)
Assumption: The lower import demand leads to the decrease of the world market price from Pw
to P`w ΔCS = -a-b-c-d ΔPS = a ΔST = c+e ΔW = -b-d+e Allocation TOT Losses Losses
Q
Price
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Welfare Effects of the guaranteed Price(Big exporting country)
Assumption: The higher export supply leads to the decrease of the world market price from
Pw to P`w ΔCS = -b-c ΔPS = b+c+d ΔST = -(c+d+e+g+h+i) ΔW = -c-e-g-h-i Allocation TOT Losses Losses
Price
Quantity
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Externalities
An externality refers to the uncompensated impact of one person’s actions on the well-being of a bystander (Mankiw, 2004)
Case when an action of an economic agent affects the utility or production possibilities of another in a way that is not reflected in the market place (Just et al., 2004)
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• Negative externalities lead markets to produce a larger quantity than is socially desirable.
• Positive externalities lead markets to produce a smaller quantity than is socially desirable.
Externalities
• Appear when there is influence of the economic activities of producer or consumers (economic units) over other economic units, they cause advantages or disadvantages without being evaluated
• Externalities cause markets to be inefficient, and thus fail to maximize total surplus
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Negative external effects
quantity
price
D
SMC private
How can I show in this
diagram the social effects?
With the help of the damage function!
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Damage function
= Relationship between production quantities and negative external effects
quantity
External effect in monetary units
Negative external effect (NEE) = ¼ q2
Marginal External Effect (MEE) = qq
NEE21
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quantity
price
D
SMC private
S*MC social=MC private + MEE
MEE (marginal external effect)
qprivateqsocial
Negative external effects (without trade)
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quantity
price
D
SMC private
S*
MEE
qprivateqsocial
ab
c
d
Reference system: qsocial
ΔVCsocial = ΔVCprivate + ΔVCext
= c + d + d= c + d + a + b
Negative external effects (without trade)
pprivate
psocial
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Internalising an externality
Altering incentives so that people take into account the externality and act analogous
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The Types of Private Solutions
• Moral norms and social sanctions
• Voluntary organizations (foundations and associations)
• Contracts between parties
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Coase Theorem:
The private economic actors can solve the problem of externalities among themselves. Whatever initial distribution of rights, the interested parties can always reach a bargain in which everyone is better off and the outcome is efficient.
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Why private solutions do not always work?
• Transaction costs • Breakdown of agreements• Coordination problem of the large number of
interested parties
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Internalising an externality
• Achieving the Socially Optimal Output• The government can remedy an externality by
Regulation, i.e. making certain behaviours either required or forbidden or
• by using market based policies like imposing a tax (or a subsidy) on the producer to reduce (or increase) the equilibrium quantity to the socially desirable quantity. Example Pigovian Taxes
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quantity
price
D
SMC private
S* MC social
qprivateqsocial
ΔCS = -a-b-c ΔPS = -e-f-g ΔST = a+b+e+f ΔEA1 = g+c+d ΔW = +d
Internalising an externalityPigovian taxes
P2
Po
P1 da b c
e f g
1 External Agents
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Positive external effects (with trade)
quantity
price
D
S*
SMC private
Pw
Pi
abc
d
e
qS,p qS,s qD,2 qD,1
Import tariff:
ΔU = -d-e-(ΔVCs) = -(+c)-(ΔIE) = -(-b-c-e) ΔW = +b-d
ΔU = 0-(ΔVCs) = -(+c)-(ΔIE) = -(-b-c) ΔW = +b
by-product distortion
Producer subsidy:
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Monopoly
quantity
price
monopoly
n
ii MCMCS
1
Pcomp.
qcomp.
D
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Monopoly
quantity
price
monopoly
n
ii MCMCS
1
Pcomp.
qcomp.qmon.
MRmonopoly
D selling price function
Pmon
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Quantity of Output
Demand
(a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve
0
Price
Quantity of Output0
Price
Demand
Figure 2 Demand Curves for Competitive and Monopoly Firms
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Quantity of Water
Price
$1110
9876543210
–1–2–3–4
Demand(averagerevenue)
Marginalrevenue
1 2 3 4 5 6 7 8
Figure 3 Demand and Marginal-Revenue Curves for a Monopoly
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QuantityQ Q0
Costs andRevenue
Demand
Average total cost
Marginal revenue
Marginalcost
Monopolyprice
QMAX
B
1. The intersection of themarginal-revenue curveand the marginal-costcurve determines theprofit-maximizingquantity . . .
A
2. . . . and then the demandcurve shows the priceconsistent with this quantity.
Figure 4 Profit Maximization for a Monopoly
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Monopolyprofit
Averagetotalcost
Quantity
Monopolyprice
QMAX0
Costs andRevenue
Demand
Marginal cost
Marginal revenue
Average total cost
B
C
E
D
Figure 5 The Monopolist’s Profit
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Monopoly
quantity
price
monopoly
n
ii MCMCS
1
Pcomp.
qcomp.qmon.
MRmonopoly
D selling price function
Pmon
a b
cΔCS = -a-bΔPS = +a-cΔbudget= 0ΔW = -b-c
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quantity
price
Pcomp.
qcomp.qmon.
MRmonopoly
D selling price function
Pmon
Monopoly and negative external effects
Sprivate
Ssocial
-
qs
-
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quantity
price
Pcomp.
qcomp.qmon.
MRmonopoly
D selling price function
Pmon
Monopoly and negative external effects
Sprivate
Ssocial
qs
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Price support and unemployment
- -
quantity
price D Sprivate
Pw
Pi
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Price support and unemployment
quantity
price D Sprivate
Ssocial
Pw
Pi
a b c d
efg
ΔU = -b-e-(ΔVC) = -(+g) ΔER = e+f+g-(ΔIE) = 0 ΔW = -b+f
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Welfare measurement of multiple price changes
hrs of labour
wage
Value of marginal product(demand curve for labor)
Input (factor) market Output market
quantity
price S(W0)
a
PS = total revenue – variable cost= value of product – wage= a
W0
L0
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Welfare measurement of multiple price changes
a) Factor price changes (falls), by constant output prices
hrs of labour
wage
D
Input (factor) market Output market
quantity
price
aW0
L0
S(W0)
W1
L1
b cd
S(W1)P0
_
q0 q1
y zx
ΔPS = b+c = z
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Welfare measurement of multiple price changes
b) Output price changes (increases), by constant input prices
hrs of labour
wage
D (P0)
Input (factor) market Output market
quantity
price
aW0
L0
S(W0)
L1
bP0
_
q0 q1
ΔPS = a = b
P1
D (P1)
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Welfare measurement of multiple price changes
c) Simultaneous changes of input & output prices, 1 variable factor
hrs of labour
wage
D (P0)
Input (factor) market Output market
quantity
price
aW0
L0
S(W0)
L1
bP0
ΔPS = x+y+z
P1
D (P1)
S(W1)
W1
c d
v x
y z
ΔPS = a+b+d
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Welfare measurement of multiple price changes
- Sequential measurement of welfare -
a)P0 → P1, W0 conts.
W0 → W1, P1 conts.W0 → W1, P0 conts.P0 → P1, W1 conts.
ΔPS(output) = +aΔPS(input) = +y+zΔPS = a+y+z
ΔPS(input) = +yΔPS(output) = +a+bΔPS = a+b+y
b)
ΔPS = x+y+z = a+b+d = a+y+z = a+b+y
b=z a=x d=y
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Empirical Measurement of Economic Policies
Numeric equilibrium models have been developed to evaluate ex ante effects of economic policies: Policy Impact Studies
General Equlibrium Models explain the whole economies, whereas the Partial Equlibrium Models are usefull for more elaborate sectoral analysis
•Comparative static-Dynamic•One product-multi product•One region-multi region•Homogenous goods-heterogenous goods
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Computable General Equilibrium (CGE)
The General Equilibrium models consist of a system of equations, which cover all the money and goods flows in an economy
For the calculation of General Equilibrium Models variables must be determined eather as the model-endogenous or exogenous
By recursive iteration all markets are simultaneously being brought into the equilibrium.Therefore, wages, prices, investment and growth, state budget, export and import volumes, interest rates and other variables can be determined.
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A SAM is a square matrix in which each transaction is recorded only once in a cell of its own – it is conventionally agreed that the entries made in rows represent incomes or receipts, whilst the entries made in columns represent outlays or expenditures - so, for each row there is a corresponding column, i.e. for every income there exists a corresponding expenditure, with their totals being equal.
Social accounting Matrix SAM
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Thank you for your attention!