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Prepared by.

Example 2-3 : Rent control harms


the housing market.
Example 2-4 : The economics of US
farms support programs.
Example 2-5 : Working through the
market with excise duty.
Example 2-6 : Fighting the drug war
by reducing Demand and
Supply.
Rent Control Harms the Housing Market

Rent controls are Price ceilings or maximum


rents set below equilibrium rents. Although
designed to keep housing affordable, the effect
has been just the opposite - a short-age of
apartments.
Rent Control Harms the Housing Market

S
P

1,400

E
1,000

600
Shortage

Q
1.2 1.6 2.0
Millions of apartments

Without rent control, the equilibrium rent is $1000 and the equilibrium number of apartments
rented is 1.6 million. At the controlled rent of $600 per month,2 million apartments could be rented.
Only 1.2 million apartments are available at that rent, so there is a shortage of 800,000 million
apartments. apartment seekers would be willing to pay a rent of $1400 per month when only 1.2
million apartments are available.
Rent Control Harms the Housing Market
The Economics of U.S. Farm Support Programs

The federal Government has used three basic methods in


three different time to prop up farm incomes.

1930-
Early 1973 Starting
1930s 1973

The government The government also


provided incentives for The Federal gave farmers a direct
farmers to keep part of Government operated a subsidy if the market
their lands idle to avoid price support program price of certain
ever increasing surplus commodities fell below a
target price
The Economics of U.S. Farm Support Programs
S
D

Surplus
4
E

0 Q
1.8 2.0 2.2

Billions of bushels of wheat per year

In the absence of any support program, farmers produce the equilibrium quantity of 2 billion
bushels per year, sell at the equilibrium price of $3 per bushel, and total income of $6
billion. If the government establishes a price floor of $4 per bushel, farmers supply 2.2
billion bushels per year, consumers purchase only 1.8 billion bushels, and the government
must purchase the surplus of 0.4 billion bushels at the support price of $4 per bushel, for a
Working through the Market with an Excise Tax

An excise tax is a tax on each unit of a commodity.

collected from sellers


supply curve shift upward
consumers purchase a smaller quantity at a higher
price
Sellers receive a smaller net price after payment of
the tax.
Working through the Market with an Excise Tax

P($)

2.25
J`` S``
2.00

C S
1.50
E

1.00 J
0.75 N

0 Q
4 6 10
Million hamburgers per day
D and S are the demand and supply curves of hamburgers with the equilibrium point E. If a tax of $0.75 per
hamburger is collected from sellers, S shifts up by the amount of the tax to S``, since sellers now require a price
$0.75 higher than before to realize the same net after-tax price. Now S and S`` define equilibrium point C with
Q = 4 million hamburgers and P = $1.50 or $0.5 higher than before the imposition of the tax.
Working through the Market with an Excise Tax

Effects
Fighting the Drug War by Reducing Demand and Supply

If government wants to diminish the use of any


product then they reduce the supply and demand of
that product. Here the U.S government fight against
the flow of illegal drugs. They take some weapons to
win this battle.
reduce the supply of the illegal drugs
educational campaign
explain the destructive effects.
Fighting the Drug War by Reducing Demand and Supply

S`
S

P* E*

E``

P
E

D
P` E`
D`

0
Q`` Q* Q
Quantity of an illegal drug

D and S refer to the demand and supply curves for illegal drugs before the government
campaigns to reduce demand and supply. With D and S , the equilibrium price of drugs is P
and the equilibrium quantity is Q with a reduction in demand from D to D , the equilibrium
price of drugs falls to P and the sales to Q . With a reduction in supply from S to S , the
price rises to p* and sales fall to Q* . With D and S the price is P and sales Q.
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