1 / 57

Deadweight Loss: Sources and Solutions

Deadweight Loss: Sources and Solutions. David A. Anderson Centre College Chief Reader. Deadweight Loss. What is it? How do we teach it? What do the AP questions on DWL look like?. Defining Deadweight Loss.

redford
Télécharger la présentation

Deadweight Loss: Sources and Solutions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Deadweight Loss: Sources and Solutions David A. AndersonCentre College Chief Reader

  2. Deadweight Loss • What is it? • How do we teach it? • What do the AP questions on DWL look like?

  3. Defining Deadweight Loss “Losses associated with quantities of output that are greater than or less than the efficient level, as can result from market intervention such as taxes, or from externalities such as pollution.” • Krugman’s Economics for AP, p. G-3

  4. Consumer Surplus Producer Surplus In the Absence of Externalities Price SUPPLY = MSC 25 20 15 10 5 DEMAND = MSB 0 10 2030 Quantity

  5. Deadweight loss Deadweight Loss of Underproduction Price SUPPLY = MSC 25 20 15 10 5 DEMAND = MSB 0 10 20 30 Quantity

  6. Deadweight Loss Caused by a Tax SUPPLY with TAX Price SUPPLY = MSC 2.50 Per-unit Tax 2.00 1.50 1.00 0.50 DEMAND = MSB 0 10 20 30 Quantity of Soda

  7. Deadweight Loss Caused by a Quota Price QUOTA Amount SUPPLY = MSC 25 20 15 10 5 DEMAND = MSB 0 10 20 30 Quantity of Taxi Rides

  8. Deadweight Loss Caused by a Price Floor Price SUPPLY = MSC 2.50 Price FLOOR 2.00 1.50 1.00 0.50 DEMAND = MSB 0 10 20 30 Quantity of Milk

  9. Deadweight Loss Caused by a Price Ceiling Price SUPPLY = MSC 2500 2000 1500 Price CEILING 1000 500 DEMAND = MSB 0 10 20 30 Quantity of Apartments

  10. Deadweight Loss Caused by a Positive Externality Price SUPPLY = MSC 25 20 15 10 Marginal External Benefit 5 Marginal Social Benefit DEMAND 0 10 20 30 Quantity of Vaccinations

  11. Deadweight loss Deadweight Loss of Overproduction Price SUPPLY = MSC 25 20 15 10 5 DEMAND = MSB 0 10 20 30 Quantity

  12. The “Arrow” Points to the Socially Optimal Quantity Price SUPPLY = MSC 25 20 15 10 5 DEMAND = MSB 0 10 20 30 Quantity

  13. Deadweight Loss of Underproduction Price SUPPLY = MSC 25 20 15 10 5 DEMAND = MSB 0 10 20 30 Quantity

  14. The Deadweight Loss of ChristmasJoel Waldfogel, American Economic Review, 1993, vol. 83, issue 5, pp. 1328-36. Price SUPPLY = MSC 25 20 15 10 5 DEMAND = MSB 0 10 20 30 Fruit Cakes

  15. Deadweight Loss of Overproduction Due to an Externality Price Social Marginal Cost 5 Marginal External Cost 4 SUPPLY 3 2 1 DEMAND 0 10 20 30 Quantity of Gasoline

  16. $/unit 0 1 2 3 Quantity of Cola

  17. $/unit Demand (additional benefit per unit) 0 1 2 3 Quantity of Cola

  18. $/unit Supply (additional cost per unit) 0 1 2 3 Quantity of Cola

  19. $/unit Supply Demand 0 1 2* 3 Quantity of Cola

  20. True Additional Cost per Unit = Marginal Social Cost $/unit Supply Demand 0 1* 2 3 Quantity of Cola

  21. Marginal Social Cost $/unit Supply Demand 0 1* 2 3 Quantity of Cola

  22. Deadweight loss Marginal Social Cost $/unit Supply Demand 0 1* 2 3 Quantity of Cola

  23. Teaching Net Gains

  24. Utility Gains from a Sack Lunch • Time required: 10-15 minutes • Materials: Each person needs one or more random knick-knack worth about 25 cents (lunch sack optional).

  25. How Happy Are You? • With what you brought?

  26. How Happy Are You? • With what you brought? • After Trading with Neighbors

  27. How Happy Are You? • With what you brought? • After Trading with Neighbors • After Trading with Anyone

  28. The Gains from Trade • The net gains enjoyed when trade can occur, • And the increases in those net gains when more trade can occur, • Are the types of gains foregone as DEADWEIGHT LOSS when the amount of trade is reduced by quotas, taxes, price ceilings, and price floors.

  29. Teaching Externalities THE ECOMEDY CLUB • Time required: 15-20 minutes • Materials required: • 2 random books, identical or not • 10 knock-knock jokes

  30. How to Play This experiment involves: 2 independent producers of human capital (memorizers) and 2 joint consumers of humor (comedians). The comedians sit on opposite sides of the room, with the memorizers seated roughly in the middle.

  31. How to Play The memorizers’ goal is to memorize as many consecutive words in a randomly selected sentence as they can in 30 seconds. • First with silence • Then with comedy

  32. Knock Knock! Who’s there? Amos. Amos who? Amosquito just bit me! Knock Knock! • Who’s there? • Andy. • Andy who? • Andy bit me again! Knock Knock! Who’s there? House. House who? House it going? Knock Knock! Who’s there? Olive. Olive who? Olive You! Knock Knock! Who’s there? Sarah. Sarah who? Sarah doctor in the house? • Knock Knock! • Who’s there? • Boo. • Boo who? • Stop crying, it’s just a joke! • Knock Knock! • Who’s there? • Goat. • Goat who? • Goat to the door and find out! • Knock Knock! • Who’s there? • Leaf. • Leaf who? • Leaf me alone! • Knock Knock! • Who’s there? • Justin. • Justin who? • Justin time for supper! • Knock Knock! • Who’s there? • Les. • Les who? • Les go for a swim!

  33. You will find that there are negative externalities from comedy!

  34. Source • David Anderson and James Chasey, Favorite Ways to Learn Economics 3e, Worth Publishers, 2011.

  35. SCORING GUIDELINES (d) 1 point: • One point is earned for concluding that, owing to the tax, the market is no longer allocatively efficient AND that total surplus decreases or the tax creates a deadweight loss.

  36. 2011 AP Questions

  37. 10. Overseas Micro 2 (a)(iii) Question: Suppose research shows that the more college education individuals receive, the more responsible citizens they become and the less likely they are to commit crimes. • Draw a correctly labeled graph for the education market and show … (iii) Deadweight loss at the market equilibrium, completely shaded.

  38. PRICE Deadweight loss from underproduction Supply = Marginal Social Cost PM Marginal Social Benefit Demand = Marg. Private Ben. 0 QM QS Quantity of Educations

  39. 5. Overseas Micro 2 part (b) Question: Assume that the government imposes an effective (binding) price ceiling on the price of college education. (ii) Does this price ceiling increase, decrease, or have no impact on the deadweight loss in this industry? Explain.

  40. PRICE Supply = Marginal Social Cost PM Marginal Social Benefit Demand = Marg. Private Ben. 0 QM QS Quantity of Educations

  41. PRICE Supply = Marginal Social Cost P1 PM PCeiling Marginal Social Benefit Demand = Marg. Private Ben. 0 QC QM QS Quantity of Educations

  42. 5. Overseas Micro 2 part (b) Answer: Deadweight loss will increase because the quantity supplied will decrease.

  43. 1. Micro 3 (a) Question: Draw a correctly labeled graph of the market for good X [known to create a negative externality] and show … (iv) The area of deadweight loss, shaded completely

  44. Answer: Marginal Social Cost PRICE Deadweight loss from over production Marginal Private Cost Demand = MSB QS QM QUANTITY Market Quantity 4.1% answered correctly

  45. 2010 AP Question

  46. The Graph Provided PRICE J Supply = MPC K U P5 L N P4 M P3 T P2 R S Demand = MSB P1 q1 q2 q3 q4 q5 QUANTITY

More Related