Economic Policies and Efficiency: Exercises and Applications Lecture 6 – academic year 2014/15 Introduction to Economics Fabio Landini Ex. 6.1 – The market for cigarettes If the equilibrium price on the market for cigarettes is equal to 10 Euro a packet, and the State imposes a MINIMUM price equal to 12 Euro, we have… A) … An excess supply: the quantity supplied is greater than the quantity demanded. B) ... Scarcity: the quantity demanded is greater than the quantity supplied. C) ... No effect on the market. Ex. 6.2 – Tax on petrol (I) Question The European Parliament decides that the EU must decrease the level of air pollution by reducing the use of petrol in road transports. Therefore, it introduces a tax on petrol of 0.50 € a litre. Should the EU introduce a tax on consumption or production? Explain in detail by using a graphical representation (S&D model). Ex. 6.2 – Tax on petrol (II) Question If the demand for petrol were more elastic, would this tax be more or less efficient in reducing the quantity of petrol that is consumed? Explain in detail by using a graphical representation (S&D model). Ex. 6.2 – Tax on petrol (III) Question Do the consumers of petrol obtain some benefits from the introduction of the tax? Do the workers of the petrol industry obtain some benefits from the introduction of the tax? Ex. 6.3 – Tax and prices Question Two market equations: QO = 2P QD = 12 – P a) Find the equilibrium price and quantity; b) What happen if the Government imposes a tax T on producers? Ex. 6.4 – More on cheese market (I) Question Two market equations: QD = 9 – P QS = 3P – 3 Compute the surplus of the consumer and the surplus of the producer in equilibrium. Ex. 6.4 – More on cheese market (II) Question The government decides that the price of cheese that is determined on the market is too low. Suppose that the Government introduces a minimum price. Draw the S&D graph and show the effect of such policy on the market price and on the quantity sold. Does this intervention induce scarcity or excess supply? Ex. 6.5 – More on cheese market (III) Question The farmers of a given country complains that the imposition of the minimum level of price on cheese has reduced their total revenue. Is it possible? Explain why. Ex. 6.4 – More on cheese market (IV) Question In response to the farmers’ complaints, the Government to buy all the excess supply of cheese from farmer at the limit price. In comparison with the introduction of the minimum price, a) Who benefits from this new intervention? b) Who is damaged? Ex. 6.5 – Lemonade Question The (usual) chilling destroys part of the lemon harvest in Sicily. a) Which is the effect on the consumer surplus in the market for lemonade? b) What happen to the surplus of the lemonade producers?