1 / 42

Markets and Incentives: Theory

Markets and Incentives: Theory. Hadi Yektas The University of Melbourne. Outline. WTP (valuation) and WTA (cost) Total surplus and efficiency Price formation and division of surplus Trading institutions: decentralized bargaining, auctions, markets

vevina
Télécharger la présentation

Markets and Incentives: Theory

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. Markets and Incentives: Theory Hadi Yektas The University of Melbourne

  2. Outline • WTP (valuation) and WTA (cost) • Total surplus and efficiency • Price formation and division of surplus • Trading institutions: • decentralized bargaining, auctions, markets • Consumer’s surplus and producer’s surplus • Incentives • Government interventions and deadweight loss • Price controls, taxes, subsidies, quotas • Credence goods • Inability to determine/calculate valuations / costs • Many people • on one side • on both sides

  3. WTP: valuation and WTA: cost WTP: Willingness to Pay WTA: Willingness to Accept • Consider a buyer • whose valuation is $50 • and a seller • whose prod. cost is $20 • who are matched via a trading institution such as • bargaining, • auction / procurement, • competitive market. $50 $20

  4. Total Surplus and Efficiency • The difference between • the buyer’s valuation and • the seller’s production cost is called total surplus and it represents the benefit from a potential trade. • A surplus is realized only if the trade takes place. • It is efficient for a trade • to take place if valuation > production cost and • NOT to take place if valuation < production cost. $50 Benefit from trade $30 $20

  5. Efficiency as a Performance Measure Performance of Trading Institutions • Note, we haven’t specified a price, yet! • The price and • the allocation / matches • we took as given are determined by the trading institution. • Efficiency of • the trading institution / the policy is judged on the basis of whether it • enables trades with positive total surplus and • rules out those with negative total surplus . • Efficiency • of the trade of a good increases with the size of the total surplus. $50 Benefit from trade $30 $20

  6. Price formation and division of surplus Bargaining, auctions, markets • Now, suppose that the trading institution leads to a price of $40. • Then, • the buyer’s surplus is valuation minus price, • namely, $50-$40=$10, and • the seller’s surplus is price minus cost, • namely, $40-$20=$20. $50 Buyer’s Surplus $10 $40 Seller’s Surplus $20 $20

  7. Price formation and division of surplus Bargaining, auctions, markets • As the price goes down • the buyer’s surplusincreases, whereas • theseller’s surplusdecreases. while • the total surplusstays the same. $50 Buyer’s Surplus $10 $40 Seller’s Surplus $20 $20

  8. Price formation and division of surplus Bargaining, auctions, markets • As the price goes down • the buyer’s surplusincreases, whereas • theseller’s surplusdecreases. while • the total surplusstays the same. $50 Buyer’s Surplus $20 $30 Seller’s Surplus $10 $20

  9. Buyer’s Incentive Incentives • A buyer has an incentive • to engage in a trade such that • price < valuation. Given that he is already engaged in such a trade, • he also has an incentive • to lower the price so as to • increase his surplus at the expense of the seller. $50 Buyer’s Surplus $20 $30 Seller’s Surplus $10 $20

  10. Seller’s Incentive Incentives • A seller has an incentive • to engage in a trade such that • price > production cost. Given that she is already engaged in such a trade, • she also has an incentive • to increase the price so as to • increase her surplus at the expense of the buyer. $50 Buyer’s Surplus $20 $30 Seller’s Surplus $10 $20

  11. Price Floor and Deadweight Loss(DWL) Government Intervention • If the price floor is • above the buyer’s valuation, then • it will rule out the trade and • create a DWL. • If it is • between the pre-floor price and the buyer’s valuation, then • it will affect the division of the surplus • but will not create a DWL • Otherwise, it will not affect the outcome. $50 $40 $20

  12. Price Floor and Deadweight Loss(DWL) Government Intervention • If the price floor is • above the buyer’s valuation, then • it will rule out the trade and • create a DWL. • If it is • between the pre-floor price and the buyer’s valuation, then • it will affect the division of the surplus • but will not create a DWL • Otherwise, it will not affect the outcome. $60 Price Floor $50 $40 $20

  13. Price Floor and Deadweight Loss(DWL) Government Intervention • If the price floor is • above the buyer’s valuation, then • it will rule out the trade and • create a DWL. • If it is • between the pre-floor price and the buyer’s valuation, then • it will affect the division of the surplus • but will not create a DWL • Otherwise, it will not affect the outcome. $50 $45 Price Floor $40 $20

  14. Price Floor and Deadweight Loss(DWL) Government Intervention • If the price floor is • above the buyer’s valuation, then • it will rule out the trade and • create a DWL. • If it is • between the pre-floor price and the buyer’s valuation, then • it will affect the division of the surplus • but will not create a DWL • Otherwise, it will not affect the outcome. $50 $40 $30 Price Floor $20

  15. Price Ceiling and Deadweight Loss Government Intervention • If the price ceiling is • below the seller’s cost, then • it will rule out the trade and • create a DWL. • If it is • between the pre-ceiling price and the seller’s cost, then • it will affect the division of the surplus • but will not create a DWL • Otherwise, it will not affect the outcome. $50 $40 $20

  16. Price Ceiling and Deadweight Loss Government Intervention • If the price ceiling is • below the seller’s cost, then • it will rule out the trade and • create a DWL. • If it is • between the pre-ceiling price and the seller’s cost, then • it will affect the division of the surplus • but will not create a DWL • Otherwise, it will not affect the outcome. $50 $40 $20 $10 Price Ceiling

  17. Price Ceiling and Deadweight Loss Government Intervention • If the price ceiling is • below the seller’s cost, then • it will rule out the trade and • create a DWL. • If it is • between the pre-ceiling price and the seller’s cost, then • it will affect the division of the surplus • but will not create a DWL • Otherwise, it will not affect the outcome. $50 $40 $30 Price Ceiling $20

  18. Price Ceiling and Deadweight Loss Government Intervention • If the price ceiling is • below the seller’s cost, then • it will rule out the trade and • create a DWL. • If it is • between the pre-ceiling price and the seller’s cost, then • it will affect the division of the surplus • but will not create a DWL • Otherwise, it will not affect the outcome. $50 $45 Price Ceiling $40 $20

  19. Taxes and Deadweight Loss Government Intervention • Ignore the price for now and • consider a tax of $10/unit on the seller. Then, • if it does not rule out a trade, • then it will shrink the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well rule out some potentially beneficial trades • and thus create a DWL. Before Tax $50 $20

  20. Taxes and Deadweight Loss Government Intervention • Ignore the price for now and • consider a tax of $10/unit on the seller. Then, • if it does not rule out a trade, • then it will shrink the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well rule out some potentially beneficial trades • and thus create a DWL. Before Tax $50 $30 BS + SS = TS $20

  21. Taxes and Deadweight Loss Government Intervention • Ignore the price for now and • consider a tax of $10/unit on the seller. Then, • if it does not rule out a trade, • then it will shrink the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well rule out some potentially beneficial trades • and thus create a DWL. After Tax $50 $30 $20

  22. Taxes and Deadweight Loss Government Intervention • Ignore the price for now and • consider a tax of $10/unit on the seller. Then, • if it does not rule out a trade, • then it will shrink the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well rule out some potentially beneficial trades • and thus create a DWL. After Tax $50 $20 BS + SS $30 $10 Tax Revenue $20

  23. Taxes and Deadweight Loss Government Intervention • Ignore the price for now and • consider a tax of $10/unit on the seller. Then, • if it does not rule out a trade, • then it will shrink the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well rule out some potentially beneficial trades • and thus create a DWL. Before Tax $25 Potential benefit from trade: $5 $20

  24. Taxes and Deadweight Loss Government Intervention • Ignore the price for now and • consider a tax of $10/unit on the seller. Then, • if it does not rule out a trade, • then it will shrink the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well rule out some potentially beneficial trades • and thus create a DWL. After Tax $30 $25 DWL: $5 $20

  25. Subsidies and Deadweight Loss Government Intervention • Ignore the price for now and • consider a subsidy of $10/unit to the seller. Then, • if a trade is already possible without a subsidy, • then it will increase the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well enable some trades that are not beneficial • and thus create a DWL. Before Subsidy $50 $30

  26. Subsidies and Deadweight Loss Government Intervention • Ignore the price for now and • consider a subsidy of $10/unit to the seller. Then, • if a trade is already possible without a subsidy, • then it will increase the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well enable some trades that are not beneficial • and thus create a DWL. Before Subsidy $50 $20 BS + SS $30

  27. Subsidies and Deadweight Loss Government Intervention • Ignore the price for now and • consider a subsidy of $10/unit to the seller. Then, • if a trade is already possible without a subsidy, • then it will increase the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well enable some trades that are not beneficial • and thus create a DWL. After Subsidy $50 $30 $20

  28. Subsidies and Deadweight Loss Government Intervention • Ignore the price for now and • consider a subsidy of $10/unit to the seller. Then, • if a trade is already possible without a subsidy, • then it will increase the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well enable some trades that are not beneficial • and thus create a DWL. After Subsidy $50 $20 TS BS + SS $30 $10 Cost of Subsidy $20

  29. Subsidies and Deadweight Loss Government Intervention • Ignore the price for now and • consider a subsidy of $10/unit to the seller. Then, • if a trade is already possible without a subsidy, • then it will increase the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well enable some trades that are not beneficial • and thus create a DWL. Before Subsidy $30 No benefits from trade $25

  30. Subsidies and Deadweight Loss Government Intervention • Ignore the price for now and • consider a subsidy of $10/unit to the seller. Then, • if a trade is already possible without a subsidy, • then it will increase the sum of buyer’s and seller’s surplus. • But the total surplus will stay the same. But • it may as well enable some trades that are not beneficial • and thus create a DWL. After Subsidy $30 DWL $25 $20

  31. Quotas and Deadweight Loss Government Intervention • Consider 2 buyers and 2 sellers that are matched as seen in the figure. • Then the total surplus is ($50-$20)+($30-$25)=$35 • If a quota restricts the number of trades to single unit, then the total surplus can be at most $30. • Thus, the quota would create a DWL that is at least as large as $5. Before Quota $50 $30 $25 $20 2 1

  32. Quotas and Deadweight Loss Government Intervention • Consider 2 buyers and 2 sellers that are matched as seen in the figure. • Then the total surplus is ($50-$20)+($30-$25)=$35 • If a quota restricts the number of trades to single unit, then the total surplus can be at most $30. • Thus, the quota would create a DWL that is at least as large as $5. Before Quota $50 $30 $25 $20 2 1

  33. Quotas and Deadweight Loss Government Intervention • Consider 2 buyers and 2 sellers that are matched as seen in the figure. • Then the total surplus is ($50-$20)+($30-$25)=$35 • If a quota restricts the number of trades to single unit, then the total surplus can be at most $30. • Thus, the quota would create a DWL that is at least as large as $5. After Quota $50 $30 $25 $20 2 1

  34. Quotas and Deadweight Loss Government Intervention • Consider 2 buyers and 2 sellers that are matched as seen in the figure. • Then the total surplus is ($50-$20)+($30-$25)=$35 • If a quota restricts the number of trades to single unit, then the total surplus can be at most $30. • Thus, the quota would create a DWL that is at least as large as $5. After Quota $50 $30 DWL $25 $20 2 1

  35. Credence Goods • It may be that the buyer (the seller) is unable to • determine or • calculate his valuation (her cost) • Then, this uncertainty can preclude trade if • the uncertainty is too big and/or • the seller’s cost is too high (the buyer’s valuation too low). $50 $20

  36. One Seller and Many Buyers • An efficient auction matches the seller with the buyer who has the highest valuations. • Example: Pricing in an English auction $50 $40 $30 $20

  37. One Seller and Many Buyers • An efficient auction matches the seller with the buyer who has the highest valuations. • Example: Pricing in an English auction $50 $40 Total Surplus $30 $20

  38. One Seller and Many Buyers • An efficient auction matches the seller with the buyer who has the highest valuations. • Example: Pricing in an English auction Price = 2nd highest valuation $50 $40 Total Surplus $30 $20

  39. Many Sellers and One Buyer • An efficient procurement matches the buyer with the seller who has the least production cost. • Example: Pricing in an English procurement auction $50 $40 $30 $20

  40. Many Sellers and One Buyer • An efficient procurement matches the buyer with the seller who has the least production cost. • Example: Pricing in an English procurement auction $50 $40 Total Surplus $30 $20

  41. Many Sellers and One Buyer • An efficient procurement matches the buyer with the seller who has the least production cost. • Example: Pricing in an English procurement auction $50 $40 Total Surplus $30 Price = 2nd least cost $20

  42. Many Sellers and Many Buyers • There exist quite many trading institutions that can potentially govern the relationships between • buyers and • sellers of the same good if there are many of each. • Each of these institutions will potentially perform differently. $50 $30 $25 $20 2 1

More Related