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Markets in actionMacroeconomic Foundation Alaleh Mani2011
Turbulent Time House Price after natural disaster Agriculture crisis(drought, flood,…) Illegal activities (drugs, copy write,…) Black Market Labor Wages War for natural resources
Housing Market and Rent ceiling
Dollars of rent
Quantity After earth quack in San Francisco
Demand remain same as before
LRS
Regulated Housing Market Price ceiling = Rent Ceiling=regulation It is effective when force of Market law
and regulation law are in conflict It is effective when RC<Pe
Gray Shade Illegal Region
Search activity and Black Market Search activity=TIME to search someone to
do business with or alternative choice Shortage cause a desire to search activity Black Market is for those buyer and seller
who seek higher price Landlord charge for worthless fitting or Key
Money (extra charge for new key and locks) (schweser 2008 Dec)
Level of black Market == how tightly is price ceiling (schweser 2008 Jun)
Inefficiency DWL and Loss from search activity (CFA
book 2009)Estimation of potential loss from search activity
Not Fair Rules are not fair due to not voluntary
exchange Result are not fair due to DWL and
search Loss Rent ceiling create more shortage History rent ceiling in practice failed In
London after wwII in SF after Earthquake
Labor Market and minimum wage Labor saving technology is the main shock
(telephone operator, low skilled farmer)
Perfectly elastic
Perfectly elastic
Innovation ,Technology
Labor Take skill or OJT(on
job training)
The adjustment time ≈ elasticity of supply (CFA Exam June 2007)
On Job Training occurs while Labor supply is decreasing (CFA Exam June 2008)
Long run Low skilled Market is a competitive Market (Schweser 2009)
easy get in and get out great number of participant.
Minimum Wage effect Price floor=minimum wage=regulation Minimum wage is effective if is in
conflict with market force effective Minimum wage>Pe
Illegal Region
InefficiencyPotential loss
from job search (cfa book 2009)
Human Capital has different behavior Minimum wage cause unemployment?
OR: It encourages productivity? It prevents labors to quit? Firm anticipation on increasing wage
make them fire more? What about increasing population?
(advocating proof)
Living Wage Law a minimum wage 30%(Wage /hour)* ((40)hours/week ))*(4
weeks)=(housing rent/month)
Two type of question:
If house rent =x how much living wage should be
Living wage definition
Sales Tax
Sales Tax
Buyerfull
Less than full
seller fullLess
than full
Social Security
Social Security Tax
employer
full
Less than full
employee full
Less than full
Tax incident
Tax on seller and buyer differences How the tax burden is distributed between buyers
and sellers of a product? Is the distribution of tax burden the same if the tax is
imposed on consumption or production?
D with tax
Buyer payment-seller receive=gov tax income
Size of wedge is important not side of tax
Tax and Elasticity
Tax and efficiencyTax on Van Gogh has
the lowest DWL and
highest tax income
both curves are
inelastic
Subsidies and QuotasHarvest demand supply curve
1. Market supply is perfectly elastic due to momentary supply curve
2. agricultures have inelastic Social demandIndividual Farmer income
decrease
Harvest and Revenue
Government intervention Subsidies Quotas Price Floor (minimum wage)
Subsidies :DWL cause Inefficient use of scarce resources
S-su
bsid
y
DWL
Over Production
Quotas: Upper limit of Quantity to be produced Underproduction inefficient sugar, tobacco, cotton and importstiny little increase in production brings good profit for one producer while more than that vanish it totally
Illegal region
Quantity decrease
Price rises
Cost falls
Market for Illegal goods
Quantity of illegal good
CB
L t
o b
uyer
CB
L t
o s
eller
-CBL
+CBL
Tax on Drugs Since Cost of Break the law should be high Therefore Police need to afford the cost of
enforcing law so what bout Imposing tax :
1.income tax use in education and enforcing law
2.Imposing tax cause a bad feeling of drug advocating
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