Lecture 5(i) Announcements

Midterm Covers through Lec5(ii) Practice midterm at Moodle (look at it before recitation sections this week) Question and Answer Sessions Wed: 4-5:30pm (Anderson 210) Wed: 7:30-9pm (Blegen 5) Thur: 3:30-5pm (Anderson 210)

My Office Hours This Week

o Wed 1:30-3:25 (usual) o Thur: 1:30-2:30 (extra)

Large Lectures (Wiley 175) cancelled this Friday. Next Mon (Oct 12), go to evening midterm, 7-8pm instead of lecture. Rooms posted later today Bring #2 pencils and University ID Don’t Bring: Calculators and Scratch Paper.

Lecture

1. More on marginal tax rates 2. Price Controls

Key Principle in Economics: Look at Incentives at the Margin That’s where the decision making is taking place Last Class: “Name Tax” S1,S2,S3, D1,D2,D3 each pay $2 Key thing: D4, D5, S4, S5 decision making not distorted. These are the marginal units affected by the tax. “Name Tax” a metaphor for policies to give tax breaks at the margin, (e.g. real estate tax break for some new business that wouldn’t open “but for” the break.)

When talking about incentive effects of taxes on labor, we look at the

marginal tax tate Rate paid on last dollar earned. Key rate used in decision making about how much to work.

Come back to example of the students. Talked about payroll tax (social security and medicare)

How collected? 7.65% taken out of worker paycheck

subtract from wage to get PS

7.65% collected from firm

add to wage to get PD

But who bears the burden of the tax? Depends

elasticity of supply elasticity of demand

Suppose demand and supply for student labor looks like this

_______ bears burden of social

security tax Good arguments that labor demand is highly elastic (for most workers). So we will go with this.

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2. Price Controls Price Ceiling Pceiling

Regulation: P ≤ Pceiling Examples?

Price Floor Pfloor

Regulation: P ≥ Pfloor Examples?

Key point: With price controls market quantity is minimum of supply and demand. Binding price ceiling

→ Excess Demand

Binding price floor

→ Excess Supply

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Producer Surplus easy to calculate (All sellers who want to sell are able to sell). So we use normal rule of calculating area under the PS line (the price producers get) and above the supply curve. Easy to calculate ∆PS

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What is CS? It depends There are 7 people who want a widget (D1, D2, D3, D4, D5, D6, D7), but only 3 are for sale. CS depends on who gets the widgets because they differ in willingness to pay.

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