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Okay, so, today we're going to talk about more
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...issues using it for studying to particular
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generic types of situations in markets first one is
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...price control there are many ways in which we try to control prices
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in a market or discuss what that
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...the consequences of that are so,
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that you can make a decision of whether you want to support these things are not...use the
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example of rent control but that it occurs pervasively actually and the
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second one is the enormous topic of taxation we want to talk about how taxes
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affect markets and then ultimately who ends up paying for taxes.
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Is not necessarily as simple as
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you might think who ends up paying for attacks and,
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if you have in your mind you want to pay for it the analysis we're
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going to do today is going to show you how you want to place the tax on what kinds of good you want to
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place attacks to make sure the person you think should be paying the tax will pay it
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okay so it's very important topics and
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the issues in this analysis as an much of analysis with
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...has to do with the steepness of the demand and supply curves want
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to go over this just a little bit and get some examples going on it that
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we'll use then later when we talk about how...things play out with price control
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and taxes so let's first look at demand responsiveness what I've written shown here
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...different curves...I'm steeper than the other day and,
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I just want...concepts here let's first look at the steeper demand curve if you
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raise the price with that steep demand curve there's going to be a
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very small drop in the quantity that people consume of the good it's going to
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be just a small decrease and how much people buy of the good when you raise the
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price what is an example of a good with a steep demand curve?
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Drugs we already did that one right what else.
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Gasoline.
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Other examples.
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Housing.
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Housing is a good example let me think of...come up with that later so let's keep that
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one in mind housing is very steep demand everyone has to have a house staple foods
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I'm going to keep that one of mine housing and food because they're going to come up
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in an example now when I change it now let's look at those less steep demand curve.
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The same increase in the price.
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Causes people to quit buying this good in mass quantities so a lot of
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people quit buying it and use their money for something else thing what
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are examples of demand curves that are less deep that are relatively flat?
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Maybe so I have no idea.
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...the two examples that were given for the steep demand curves actually provide
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information about relatively non steep demand curves and,
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this is very important point.
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When you look at a category of goods as a whole like housing the
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demand curve can often be relatively steep but if you look
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at one component within that category such as?
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Housing in pleasant and.
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...or one city okay demand curves going to be less deep.
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Because people have to have
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housing but they don't have to have it in that particular neighborhood.
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Ok, so, if the price rose for housing in general
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they would be very little reduction in demand for housing in general but if the how
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if the price rose for housing and one city.
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People would move to other cities instead of living in that city and reduce the amount of
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...demand for that one city.
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Food is another extremely good example if you raise the price of all food items
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...would be very little diminution in the quantity demanded because we have to eat to
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live but if you raise the price of one kind of food like apples
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people within switch by pairs and bananas instead and
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reduced their consumption of that good so what this actually tells you
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these the steepness of the curve is how many
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substitutes are they're out there for meeting a similar need or similar
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desire for the person and when you define the goods broadly?
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There's often not much of a substitute but when you define the goods very
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narrowly there's often much more of a substitute.
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So, an example that we're going to come up with later
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automobiles if you raise the price of all automobiles there probably is going to be much reduction
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in demand because of the fact that you know, we all feel we need
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...car to get around game but if you raise the price of foreign.
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there'd be a reduction quite a large reduction in the price and the demand for foreign because people would
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switch to domestic and this actually come becomes relevant when we try to defying
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...optimal tax policy that we want to enact because sometimes
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one place the tax on all the goods some of them on a subset of the goods and
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it'll depend critically on the relative last at the relative steepness of the demand curve.
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Much more responsive to price now I've used the word responsiveness and I'm using the
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word steeper...less deep because I like things to be very intuitive
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...like our language to be as meaningful as possible.
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There is a technical term for this called.
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Elasticity your section gs size will go over the
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definition of elasticity and how that relates to all this and how to actually measured okay it
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is exceedingly important to know that however it's even more important to know all
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of this from an intuitive perspective it's not that you'll ever have a conversation with someone in the public
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and say what the elasticity of demand is high and they'll know what you're talking about but,
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if you talk about consumers being more responsive
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...less responsive that's meaningful concept so I think it's very important to understand
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these things without the technical terms and also understand the technical terms?
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Ok, the same ideas apply for some supply if you raise
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the price of the good suppliers will respond by providing more
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of it because it's now more profitable to provide that good.
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If the demand curve is steaming supply curve is steep that
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means that suppliers will only respond a little bit to the increased
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...and if the demand of the supply curve is less deep.
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Then it means that they're going to supply.
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A lot of extra goods when the price increases
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ok so let's whoops go back there what's an example of a steep.
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Demand and supply curve your...
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You can't produce diamonds quickly real
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diamond's it's hard-to-find the ones that are there so if you raise the price it's not going to
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really increase the number that are going to be discovered or mind that's true
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...raise another example landing if you...the price of property generally it does
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increase the supply much because the lance fixed.
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...mark twain said they're not making it anymore.
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...someone else over here.
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Yes,
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because it's hard to mine gold...what's an example of
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less steep you raise the price lots of suppliers...providing more of it.
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Candy.
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Yes,...a good example because it's easy to make anyone
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can make it if you could make it a lot of profit out of it a lot of people would
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be providing it so if the price of it went up more and more people would be,
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you know,...be out there providing candy and,
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a price that covers the cost essentially anything that is relatively
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easy to produce is going to be price sensitive because as the price goes up the profits associated with
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it's going to be higher and more people are going to want to go in...provide that thing
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...so you get a relatively flat not
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steeped supply curve when things are relatively easy to produce and in fact
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you get an extreme as we'll see later of a flat supply curve in
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a perfectly competitive market ok so now we're going to use these ideas for
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two types of intervention one is price intervention we're going to use rent control is
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example what I want to show here kind of an overview is
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the reasons that economists are generally against any form of price
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control this is one thing that
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economists are pretty clear about the price control actually hurts?
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Markets and hertz consumers and producers it's
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...not a good idea however I also want you
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to realize that there are no absolutes in this field there's
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just better understanding and their can be conditions under which you
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might think legitimately knowing everything that could be wrong with price
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controls that you still think in certain circumstances they should be there I'm going to go through the arguments
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...those might be the case game so I'm going to
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start with the standard argument against price control.
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If we have.
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Rent control I'm sorry a market that is a freely operating
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market no intervention to prevent price for moving whatever it would do we
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would have demand for housing and a supply for housing say this is housing
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...rental units and berkeley and there would be some price that's
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established within that market.
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The problem that many people would see in this situation that would give rise to rent
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control is that we think the price is too high that is unfairly too high
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or it's bad because it hurts low-income people or whatever for some
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reason we feel that we don't think the prices right...the price is good.
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However, what I want to show you is that actually the problems that give rise
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to this high-price are exacerbated as soon as you try to place
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a price control to prevent the price from being that high okay suppose we've now
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instead passed a law that said you can't charge more than a certain
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amount for rental units ok so
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there's a very stylized form of rent control obviously different cities have different kinds of
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rent control in san francisco you can't raise the rent after people moved
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in but you can raise after, you know, when a new tenet comes in and berkeley you can't
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raise it except under circumstances a at all
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...so it's different things but stylized you could think of it we're setting a price
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...below what the equilibrium was what is going to be the
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impact of this on the quantity transacted recall that you always have to have
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two parties to make a transaction so the quantity transact it is actually going to
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go down this is the main reason to feel
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that rent control is actually not a good idea the problem
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that generally gives rise to rent control is there's not enough units available for the number of people
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who want to buy them so the price
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gets astronomical what happens as soon as you apply rent control is
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you make that problem even worse you reduce the number of units that are available on
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the market what happens here is some people who are willing to supply rental units
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as grandmother units or whatever in their apartment or whatever and lower
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...they're just not willing to its not profitable it's not worth the hassle and they
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take their units of the market so you have actually fewer markets fewer
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units available to this massive people that want to have them so the basic problem
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is not enough units and by putting on this...control you make that
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problem even worse by having fewer units available?
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That's the first problem.
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And, that's generally considered by economist to be the main problem is
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that it actually exacerbates the this underlying
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situation that gives rise to the need for the price control however there are two other things
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that come about that are problematic in other ways.
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One is that you necessarily create this excess demand.
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You've got now more people wanting to buy the units at that
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rent control price than there are available.
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as we know this is necessarily going to place some kind of pressure on prices
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to move up and as long as it's illegal to charge more than this.
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These this for pressure is going to be played out in illegal ways.
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It won't necessarily be affective of raising price all the way to its old
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equilibrium but there's gotta be something going on and it's generally going to be illegal
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side payments people renting an apartment at this price
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and then sub letting it at a higher price all kinds of things can go on that, you know,
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or arrangements between parties that they both agree to not to tell anyone else about so that
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it will happen so what you have is excess demand that creates these
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bizarre types of...alternative arrangements that are outside the
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market the second problem is one of allocation.
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Let's go back to without...control.
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One of the.
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Advantages.
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Of a normal up normally operating market system
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is that it allocates the goods that are sold.
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In a rational fashion
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among people what happens here is this the equilibrium price.
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Anyone who is willing to pay more than that price gets a
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unit and anyone who's willing to pay less than that price does it get a unit.
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So, it's a very simple allocation rule and it's
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one that kind of make sense that whoever's willing to pay more.
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You know, it's worth it more to them so they should get it
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right so anyone who's willing to pay more gets the unit anyone
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who's willing to pay less doesn't get the unit it's a nice dividing thing you can think of
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...people up of how much...willing to pay for the unit and
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you just stop at the point where you've used up your units and that is
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the allocation it's a very rational allocation rule.
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It seems fair to people are willing to pay more for that relative to
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other things notice willingness to pay is always you're giving up something else it's like an opportunity
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cost which you could spend with the money so the people are most willing to give up other things
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...the...you get it with rent control however.
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You don't have that rule going on with rent control at this price you've
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got all of these people that are willing to pay that amount or more.
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But, still aren't necessarily getting the unit you don't have the people who are most willing
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to pay necessarily getting the unit,
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for example, of say this is a thousand-dollars as the controlled
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price of one person who gets that
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unit might be willing to pay a thousand and ten dollars so
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they're willing to do it and they enter the transaction
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and another person who does it get the unit might be willing to pay two thousand-dollars.
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Well, that on its face looks like
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and irrational allocation the person is willing to pay more should get the unit over the
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person who is willing to pay as much and secondly.
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...even more important about it is.
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If the person who want it got it for a
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hundred a thousand and ten dollars.
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Gave it to the person who.
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Was willing to pay two thousand-dollars and the person who got
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two thousand-dollars gave.
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Five hundred of that.
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To the other person they both be better off.
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The person is willing to pay two thousand is now paying fifteen hundred thousand dollars for the unit
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plus five hundred-dollars for the apartment to the trade with the person
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the person who's giving it up to this other guy is willing to pay
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a thousand and ten dollars but instead is getting five hundred
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dollars in return and not having to pay for the unit so
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he's like still help finds a...some place else but gets this five
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hundred-dollars cash so they're both better off.
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What it means is that
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side agreements actually can improve?
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Everyone's welfare I just showed you
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example of where both parties are helped by making the side agreement what
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...side agreement do essentially moves back up to where we were if it actually is
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activated so either we have mutually advantageous trades being
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made which essentially eliminates the role of the price control and moves
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...to the original equilibrium or we have those trades
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not being made and the gains that could be obtained from them.
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Don't occur?
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We have that...that could have occurred didn't occur.
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So, that's the problem there's three problems want reduces quantity which
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the lack of quantity was the basic underlying problem to start with to it creates
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...a surplus an excess demand which then plays out
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in various ways and third it doesn't allocate
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goods in a rational fashion in allocate similar way where
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there's always some way you could make people better off without hurting anyone so why don't we do that...
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The person who can't afford to pay willing to pay a thousand-dollars.
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Right but that person would be even better off not getting the
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apartment beginning five hundred-dollars and free money from this person who does get the apartment.
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And, then he can go by apartment somewhere else for thousand-plus fifth five hundred.
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No, let's see.
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If the person's willing to pay a thousand-dollars for the
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apartment that means they're not willing to pay fifteen hundred.
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Okay, and, if they have
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ripped the unit for a thousand and don't give it to this other person they're
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essentially paying fifteen hundred they're paying a thousand for the unit and the five hundred they
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could have gotten from the other person so they're essentially losing paying fifteen
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hundred-dollars and opportunity cost by keeping the apartment and...actually
00:20:42.690
by willing only being willing to pay a thousand would be better off having that fifteen
00:20:48.810
hundred in their pocket rather than the apartment if they work better off they
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would've been willing to pay fifteen hundred for it?
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That's the idea that this five hundred from the
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other person becomes part of the cost to the apartment of the person who's living there because they could
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have sold it for that extra five hundred dollars it's an opportunity cost.
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Yes,it.
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And, I don't want to...that is definitely true the
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prices lower the people who happened to get them are now
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getting a benefit some people are people who won't be able to afford or
00:21:39.760
couldn't afford this it's this extra amount of demand out here that is at the
00:21:44.320
lower price so it's true these people are now getting apartments that they...some of the
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...getting apartments that they wouldn't be able
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to afford wouldn't choose to afford otherwise that's true it's also true that there's
00:21:58.470
an alternative arrangement that could make them even better off...having the apartment?
00:22:03.070
And, by having this here you have those either those
00:22:07.100
trades get made which circumvent this whole process or they
00:22:13.890
don't get made in which there's kind of like money on the table sitting there that nobody's getting.
00:22:17.760
So, both of those things are true and I don't want to negate the first
00:22:23.530
one with the second one but...the two go hand-in-hand.
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And, that actually raises the...ok so those three issues that arise
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...this often issues to explain why we don't...have rent control however.
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In a situation like this where the demand
00:22:42.740
...curve is exceedingly steep.
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The most important problem.
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The one that I mission first of the reduction in supply.
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Quantity supplied that, you know, reduces the number of units and exacerbates the
00:23:01.120
problem that was causing the high prices to start with that's relatively small.
00:23:05.350
So, it might be that in this case you would be willing to
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...as a social
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judgment decide I'm willing to forgo this many units
00:23:17.880
altogether to help all these people that can't afford high prices.
00:23:22.630
And, I'm also willing to forgo the potential extra game they could get if they
00:23:30.810
made side agreements or...make the side agreements and then get the...
00:23:33.920
So, this is situation where your judgment on where you want to
00:23:38.580
lot of pollen these things up your informed of all the issues that are bob could
00:23:43.000
be very situational in situations where the supply curve is very steep
00:23:47.670
you could perhaps believe that rent control is perhaps a good idea
00:23:51.790
that equity considerations outweigh whatever problems there are with it
00:23:58.100
otherwise and when the demand when the supply curve is not steep you feel otherwise
00:24:00.580
...now where do we have rent control
00:24:08.090
berkley san francisco manhattan where else can you think of?
00:24:11.770
All those places have exceedingly steep supply curves are not building
00:24:16.320
more land in new units and san-francisco yard to get a permit
00:24:18.270
berkeley manhattan
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...exceedingly difficult where do you not have rent control.
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Phoenix there's vast wasteland all around phoenix if they ever,
00:24:33.630
you know, started raise prices of housing phoenix you just build another subdivision so,
00:24:38.590
it's perhaps the case that we are as a society actually making
00:24:43.450
semi rational decisions on how to apply rent control applying
00:24:46.350
at the situations where the problems are the least
00:24:52.370
and perhaps outweigh the equity benefits of having low-income people lower-income people
00:24:56.080
have it that doesn't mean those problems go away it's just that
00:25:18.620
they're counterbalance by these other things, yeah.
00:25:22.240
That's a...good point is question was if there's no
00:25:25.590
is if there's no rent control all the person who's willing to
00:25:30.050
pay a thousand and not get the unit just end up with this thousand-dollars and
00:25:34.730
no unit or what and that is the essence of what if you put
00:25:39.980
on rent control and then allowed everyone to make their side agreements?
00:25:41.110
You would end up back
00:25:45.960
where you started at but instead of the landlords getting that money
00:25:50.750
landlords would get this amount of money and the people who happened to...the apartments
00:25:55.750
...this low-price and then traded them through those side agreements would get the extra
00:26:00.650
money so essentially that example I'm showing is a way of transferring money from
00:26:07.520
landlords to renter's the...activate the side agreement
00:26:11.740
now as soon as you see it that way you can obviously.
00:26:13.820
Recognized that's...exceedingly
00:26:18.140
...way to transfer money if you want to transfer money from landlords to
00:26:22.860
poor people you should tax landlords and give it to poor people because this is not
00:26:28.480
necessarily poor people that are getting these it could be the rich people that are getting I'm still.
00:26:34.580
You have no idea who's getting them got this excess demand and there's no mechanism for determining who's going
00:26:39.340
to get the units in fact it leads to massive discrimination based on irrelevant
00:26:45.500
factors such as race gender employment history that kind-of thing.
00:26:49.660
So, the ...control with the side agreements
00:26:54.290
activated transfers income in a way that is probably not the
00:27:00.300
best way to do it but if that's all you can do you can't get through the laws, you know, something else
00:27:06.480
and perhaps this okay any other things this is exceedingly important question because this these kinds
00:27:14.130
of a controls come up all the time in your life you have to vote on them.
00:27:25.990
The other way that we intervene yes.
00:27:30.580
Does it rent control make the supply curve less deep?
00:27:52.240
Why would changing the price?
00:27:53.410
The which you're.
00:28:00.200
In the question is would rent control cause the supply curve to be less
00:28:03.820
And, the answer is no rent-controlled changes the price.
00:28:09.170
But, the supply curve tells you any given price how much people are willing to
00:28:09.670
supply.
00:28:16.000
So-if indeed lowering the price causes a
00:28:21.620
lot of people to not rent out their spare rooms.
00:28:26.250
Then the supply curve will be not steep it'll be like that, you know, but,
00:28:31.210
that's something that you ask when you're designing when you're figuring out what the supply curve
00:28:36.030
is you say if the price were this point how many people supply of the prices at this point
00:28:40.820
and you get all those answers so if what you're saying is true that reducing
00:28:45.140
the price will cause lots of people to not rent out their spare rooms
00:28:49.600
...supply curve is not steep it's actually like that but that's not caused by the
00:28:52.640
rent control that before you even think about doing rent
00:29:04.910
control that's just what response to prices in the market.
00:29:05.780
Okay, yes,
00:29:11.010
there is a way in which...there's layers on layers.
00:29:16.880
There's anticipation of future prices under rent control.
00:29:21.620
Without rent control you might be a developer who decides to build more
00:29:26.520
units because you think the price is going to go up to a new equilibrium that will be higher than it
00:29:31.140
currently is with...you wouldn't have that expectation so you wouldn't
00:29:35.520
bill those and that would be in case in which the actual.
00:29:40.680
Mwm putting on of rent control changes the shape of the supply curve the
00:29:44.280
long-run supply curve yes, but, that.
00:29:50.300
Kind of think about this.
00:29:54.540
I don't want that to confuse the...
00:29:56.540
Even though what I just said is true I
00:30:00.400
don't want to confuse the idea that usually it's easy
00:30:04.220
it's most effective to think of demand curve and supply curve is fixed and then
00:30:08.850
...layer your policy on top of it rather than it having a feedback
00:30:14.000
it can but...you should consider that as a separate step afterwards that's
00:30:15.520
a good point them ok.
00:30:17.640
So, taxing.
00:30:23.090
Another way we affect markets is to taxes we all care about taxes it's a big
00:30:29.560
issue we all think government needs to have money but we all want someone else to pay for it so,
00:30:36.280
it be useful to know who pays for goods how many of you remember huey long?
00:30:40.990
The governor of louisiana, yeah, anyone from the south I was from texas we all know
00:30:46.750
him here a great little...about taxes how
00:30:54.860
...don't tax me don't tax the let's tax demand behind the tree?
00:30:58.400
That's exactly what you want you get a room full of people decide what
00:31:04.010
...going to be it always ends up taxing somebody...not in the room.
00:31:08.070
Okay, so, we're going to look at this with excise tax.
00:31:09.290
Suppose there's a
00:31:14.410
fifty-cent per gallon tax put on gas and,
00:31:17.020
I'm going to this is practically what the
00:31:21.060
gas tax is about half of the total price.
00:31:24.720
Without any tax let's say the price for gases a dollar I'm doing this
00:31:29.680
just keep the numbers simple so we don't have nomenclature issues here there's a demand curve
00:31:34.480
and a supply curve there's a certain quantity that's transact what we want to figure out
00:31:39.490
is what is the impact of placing an excise tax on gasoline.
00:31:43.610
An excise tax now is attacks per unit so it's a
00:31:48.290
certain amount like ten cents per unit fifty cents per gallon whatever it
00:31:53.230
differs from a sales tax a sales tax is I percent of the price.
00:31:57.010
Our sales tax is like eight percent eight-point five percent of the sales price
00:32:03.060
this tax excise tax does not depend on the price...a certain amount
00:32:08.150
per quantity sold so it makes it easier for us to examine and section you're going to talk
00:32:14.410
about sales taxes and then from those two examples you can go to the most any kind...you want.
00:32:20.870
So, how would we represent...of attacks on this market?
00:32:24.840
I propose and hope to convince you of the fact that
00:32:29.320
you can represent a fifty cents so excise tax as
00:32:33.170
an upward shift in the supply curve.
00:32:37.360
Equal to fifty cents so you just take the curve and shifted
00:32:43.300
Now why is that.
00:32:47.840
This is the key element understanding why it is that this represent that attacks represents an upward
00:32:54.100
shift the supply curve of described the element key element here is that the price
00:32:58.870
is the price paid by consumers is what I'm describing today
00:33:02.260
so mark on your page this price paid by consumers.
00:33:07.500
Now let's just look at a particular price let's say were right here.
00:33:09.760
At that price here.
00:33:13.190
We're not there but we're asking what would people supply at that
00:33:15.930
price ok and this is the amount that supply
00:33:20.400
...the price without attacks if there's no tax.
00:33:24.840
Now we add fifty-cent tax.
00:33:27.020
What that means is?
00:33:32.080
We have to charge consumers fifty since extra for
00:33:35.960
suppliers to get exactly the same amount of money as they were before.
00:33:41.720
So, this point right here which is what suppliers are willing to pay to supply
00:33:43.540
without the tax.
00:33:47.430
Now with the tax fifty since higher.
00:33:52.750
...still willing to pay exactly that the supply exactly that amount because at this
00:33:54.690
price the
00:34:00.670
...the consumer pays the price the government takes fifty cents.
00:34:05.480
And, the supplier gets this price down here which is where they were to start with.
00:34:07.510
So, all that means is that when this is
00:34:12.440
the price paid by consumers and the government takes fifty cents out
00:34:17.420
of that price before goes to suppliers whatever the supplier was willing
00:34:21.800
to supply before is exactly saying is what they're willing to supply now
00:34:27.190
...fifty-cent higher tax...because the government takes
00:34:38.929
that extra fifty cents that's why it's an upward shift yep.
00:34:43.919
That's a good question and in fact we're going to answer the question...why did this with the supplier incorporate the
00:34:48.829
price instead of other otherwise and in fact he won't he or she won't.
00:34:49.979
But, notice again this is
00:34:54.559
the same questions here the crucial thing is to think about what the supply curves are
00:35:00.059
and demand curves are before you look at their interaction and what
00:35:04.089
at the supply curve is asking the question if the price were what
00:35:06.959
here how much would supplier supply
00:35:10.759
now the question is if the price is here?
00:35:15.139
the government takes fifty since of that price how much...suppliers willing to supply
00:35:21.189
its there that's not necessarily what suppliers will what the price will end up being
00:35:26.069
but it's the answer to that hypothetical question if the price paid by consumers was this and
00:35:29.799
the government took fifty cents suppliers would supply that amount?
00:35:32.729
Then we have to work through the whole
00:35:36.109
...of what the interaction is.
00:35:39.899
Okay, as soon as you recognize what the impact of a taxes on the demand and
00:35:45.469
supply curves is relatively simple to see what the change in equilibrium is going to be and
00:35:48.919
importantly in nearly in most cases.
00:35:50.799
...increase.
00:35:58.049
Of putting attacks on the good of a certain amount increases the price buy less than
00:36:00.730
that amount.
00:36:02.880
An example I've drawn.
00:36:03.880
The fifth the
00:36:08.530
...distance here is fifty cents and yet the new equilibrium is only
00:36:10.690
twenty five cents twenty since higher.
00:36:15.790
Now how does this come about again you don't want to just jump from one
00:36:19.780
equilibrium to another you always want to be able to look,
00:36:25.620
at the process you can think of it in two different ways hoosier name.
00:36:28.940
Jason to never ways that this could occur with a...
00:36:34.470
either the price could stay exactly as it was and then
00:36:42.030
the government take fifty cents out of it...
00:36:45.290
What that means is suppliers are now getting fifty since less
00:36:50.180
are willing to supply less of the good so now there is excess demand,
00:36:54.410
demand exceeds supply and...excess demand and that bids up the price until you move to
00:37:00.120
the new equilibrium the other way you could see it is suppliers immediately slapped
00:37:03.410
fifty cents on top of their price and remove to here?
00:37:09.910
now because the prices fifty since higher consumers don't want to buy is much and you've got
00:37:15.100
a excess supply of the good and the price bits down which
00:37:19.320
ever way it goes is irrelevant it ends up at the same point
00:37:22.300
...where the new quantity demanded is equal to the new
00:37:29.620
quantity supplied at that price when the price isprice paper consumers.
00:37:34.410
This is an important lesson I don't know-how many times I've read in the newspaper
00:37:40.670
reports of the there's going to be a tax on blank so the
00:37:44.200
price is going to rise by that amount it's just not true
00:37:48.010
...amount the price rises depends on the interaction of
00:37:51.890
demand and supply which depends on the steepness of each of those we're going to get into
00:37:57.180
...a second okay so we got a fifty-cent tax ok the government's
00:38:02.100
taking fifty cents out of every day gallon that's consumed but the price only
00:38:07.550
rose twenty cents what that means is actually producers
00:38:13.850
or having to pay the other up's but twenty since is what consumers...
00:38:18.620
Producers pay...the other at this new equilibrium this is the
00:38:23.790
price paid by consumers the government takes fifty cents which
00:38:29.810
puts producers at this point getting seventy cents a dollar twenty minus fifty cents
00:38:34.500
a seventy cents the wedge between these two is what the government gets this is
00:38:39.700
what consumers pay this is what suppliers receive.
00:38:43.240
So, the amount that consumers pay has gone up twenty cents they
00:38:45.880
pay twenty cents the amount suppliers
00:38:50.820
receive has gone down thirty cents so that means in any taxation
00:38:55.440
situation with normally shaped upward-sloping demand and...down,
00:38:59.940
you know, criss-crossing demand and supply curves you have both.
00:39:03.050
Parties paying part of the tax
00:39:06.660
consumer tax burden is the
00:39:10.830
area from the original price up to the new price and
00:39:16.670
the suppliers tax burden from the original price down to the
00:39:23.060
new price minus the tax which down here so they both share in the burden.
00:39:25.250
This interesting people don't think about this
00:39:29.720
you think about putting tax on goods usually you think well,
00:39:33.800
let's put tax on gasoline screw the oil companies it's
00:39:38.530
actually both parties that are going to have to pay it and in fact we can
00:39:43.500
tell who's going to pay the majority of it simply by the steepness
00:39:47.630
of the various curves and this is where becomes important.
00:39:49.440
For understanding.
00:39:52.450
If you want someone to pay the tax.
00:40:01.620
You...placed on the right kind of good to make that happen so let's look at the demand curve.
00:40:06.940
Here we've got a very steep demand curve.
00:40:11.690
What happens here is the consumer pays most of the tax?
00:40:12.440
The producer has
00:40:15.420
an extremely small portion of the tax burden.
00:40:19.800
So, if you want consumers to pay a lot of the tax.
00:40:24.320
You want to place the goodstax on goods which steep
00:40:30.540
demand curves so what let's go back to our examples what...steep demand curves.
00:40:31.060
Drugs
00:40:36.960
...we don't do drugs tax drugs cigarettes though.
00:40:40.030
What's interesting here is taxes on
00:40:46.440
cigarettes are practically entirely borne by the people who smoke cigarettes.
00:40:49.150
So, this idea that you're taxing cigarettes
00:40:52.830
so as to hurt the tobacco companies and happening.
00:40:59.380
All the states in the union made an agreement with the tobacco companies that they would pay a certain amount
00:41:04.430
to the states in return for...help pay for future...costs.
00:41:10.740
That was seen as a landmark where the government was forcing the cigarette companies to
00:41:17.160
give up money and handed over to the state it's done on a per pack basis.
00:41:22.130
So, what actually it is an indirect form of excise tax which means
00:41:26.580
cigarette smokers are paying for this not the tax companies and this
00:41:29.320
...example of huey...
00:41:33.490
You had the states and the cigarette companies in a room.
00:41:37.350
And, set up a procedure where someone not and room
00:41:38.180
pay the tax.
00:41:45.960
So, now you might think people who smoke deserve to pay the tax because they should be smoking in
00:41:53.450
the first-place I actually think smokers are so beleaguered anyway the.
00:41:56.520
I don't smoke not so that but you know,
00:42:02.100
they're going to have to deal with the health consequences...they have to pay for it also anyway,
00:42:06.050
you can make your decisions on this.
00:42:11.160
If you have a very...steep demand curve.
00:42:14.120
Then mostly producers pay the burden
00:42:21.590
and consumers don't have to pay very much thank you.
00:42:29.050
this again helps in deciding how you want to place taxes.
00:42:38.800
...go back to stephen again.
00:42:43.770
For cars, for example, remember I was talking about cars if you place attacks
00:42:48.510
on all cars like registration tax then that is going to be
00:42:51.020
born mostly by consumers it doesn't really help...
00:42:57.620
consumer producers much but if you put a tax on imports.
00:43:03.100
Then it will mainly be borne by the companies who are importing the
00:43:07.410
...producers so if you want the producers of a
00:43:11.560
good a subset of producers to pay for the tax
00:43:16.060
is good to put it on a subset of the goods and then those producers will have to pay
00:43:17.820
for because you want to find something
00:43:22.730
...consumers...ability to switch to something else to avoid the tax if you want consumers not to
00:43:29.870
pay it if you want consumers to pay it you put it on something that they really can't get out of to easily.
00:43:33.780
Similarly on the supply side.
00:43:36.780
If you have steep supply curves?
00:43:41.960
Such that increasing the price the good has very little effect on
00:43:44.960
the amount supplied than producers end up paying most of the
00:43:50.850
burden and supply of consumers paper little and find and
00:43:55.740
the opposite when you have not steep supply curves a
00:44:02.590
their consumers pay most of the tax what is the underlying principle I've got a
00:44:06.470
final slide there with a lot of words on it but I think what's
00:44:11.220
most interesting is to think about what is actually happening here.
00:44:13.850
Who ends up paying the tax
00:44:20.080
in a word it's the people who cannot respond?
00:44:23.760
If suppliers cannot respond to a price.
00:44:27.880
By changing their supply so they have a steep supply curve.
00:44:31.690
Then they end up paying most attacks if consumers.
00:44:33.640
Can't respond?
00:44:42.150
Really changing the quantity that they by in response to the higher price then they pay
00:44:47.090
most of the burden so essentially the way to think about it's the person
00:44:51.890
that's most constrained the party that has the fewer options winds up paying the
00:44:59.100
tax this might be unfair it's kind of like the people who already have few options
00:45:02.440
you're making their life even worse off but,
00:45:07.160
that's the way it works and that's the succinct way to think about who's going to end up paying the tax
00:45:13.390
its the party that's less able to respond is going to end up paying the tax.
00:45:14.060
Ok,
00:45:21.030
questions on this nope ok see you monday thank you.

Video OCR Contents
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Time
Texts
Demand and Supply Applications
Demand Responsiveness
Demand Responsiveness With steep demand quantity only a little D Less D
Demand Responsiveness With steep dornu'd quantity only a little D Less st— D
Demand Responsiveness With steep quantity Only a little Less D
Demand Responsiveness With steep demand quantity Only a little D Less st— D
Demand Responsiveness With stoop demand quantity Only a little D Less D
Demand Responsiveness With quantity only a little D Less D
Demand Responsiveness With stoop quantity only a little D Less st— D
Demand Responsiveness With steep demand quantity only a little D Less D
Demand Responsiveness With loss drops mud' more. D Less st— D
Demand Responsiveness With less stoop D Less st— D
Demand Responsiveness With loss stoop quantity drops rnudl D Less st— D
Demand Responsiveness With less drops more D Less D
Demand Responsiveness With less stoop quantity demar&d mud' D Less st— D
Demand Responsiveness p With less more. Less D
Demand Responsiveness With loss stoop D Less D
Demand Responsiveness With less drops mud' more. Less st— D
Demand Responsiveness With less mud' D Less st— D
Demand Responsiveness With loss drops more. D Less st— D
Demand Responsiveness Witt loss stoop more. Less D
Demand Responsiveness With loss mud' D Less st— D
Demand Responsiveness With loss quzttity dernu&d more D Less D
Demand Responsiveness With loss more D Less st— D
Demand Responsiveness Consumers aro mud' rnore to priæ D Less st— D
Demand Responsiveness are more to D Less D
Demand Responsiveness are rnore to Less D
Demand Responsiveness Consumers am mud' more to priæ D Less st— D
Demand Responsiveness aro rnore to Less D
Demand Responsiveness Consumers am mud' more to priæ D Less D
Supply Responsiveness Loss Steep S
Supply Responsiveness Raise price Loss Steep S
Supply Responsiveness With steep S. rises S LOSS S
Supply Responsiveness With steep S, rises S LOSS Steep S
Supply Responsiveness With less S. rises a
Supply Responsiveness With less S. quantity a LOSS Steep S
Supply Responsiveness With S. rises S Steep S
Supply Responsiveness With steep S, rises Loss Steep S
Supply Responsiveness With steep S. rises S LOSS Steep S
Supply Responsiveness With S, rises L-css Steep S
Rent Control
Rent Control
Rent Control
Equilibrium without Rent Control
Rent Control Sets Maximum Rent
Rent Sets Maximum Rent
Rent Control Sets Maximum Rent
Price and Quantity under Rent Control
Price and Quantity under RentControI
Price and Quantity under Rent Control
Excess Rent Coned Excess do mami
Excess ut&r Rent Excess
Excess ut&r Rent
Excess Rent Contrd QC
Excess ur&r Rent
Excess Rent Contrd QC
Excess ut&r Rent
Excess Rent
Excess ut&r Rent Excess
Excess Rent Contrd
Excess ur&r Rent
Equilibrium without Rent Control s
Equilibrium without Rent Control
Equilibrium without Rent Control s
Equilibrium without Rent Control
Equilibrium without Rent Control s
Equilibrium without Rent Control
Equilibrium without Rent Control s
Rent Control Sets Maximum Rent
Price and Quantity under Rent Control
Price and Quantity under RentControI QC QI
Price and Quantity under Rent Control
Price and Quantity under RentControI
Price and Quantity under Rent Control
Price and Quantity under QC
Price and Quantity under Rent Control
Price and Quantity under Rent Control QC QI
Price and Quantity under Rent Control
Price and Quantity under RentControI
Price and Quantity under Rent Control
Price and Quantity under Rent QC QI
Price and Quantity under Rent Control
Price and Quantity under Rent Control QC QI
Price and Quantity under Rent Control
Price and Quantity under
Price and Quantity under Rent Control
Price and Quantity under
Price and Quantity under Rent Control
Rent Control with Steep Supply Curve QC
Rent with Steep Supply Curve
Rent Control with Steep Supply Curve QC
Excise Tax A tax on a tax 50 cent
Excise Tax A tax on a gas tax of 50 cent
Rent Control with Steep Supply Curve
Rent with Steep Supply Curve QC
Rent Control with Steep Supply Curve
Rent with Steep Supply Curve
Rent Control with Steep Supply Curve QC
RentControl with Steep Supply Curve QC
Rent Control with Steep Supply Curve
Rent with Steep Supply Curve QC
Rent with Steep Supply Curve
Rent with Steep Supply Curve s
Rent Control with Steep Supply Curve
Rent with Steep Supply Curve
Rent Control with Steep Supply Curve
Rent with Steep Supply Curve
Rent Control with Steep Supply Curve
Excise Tax A tax on a tax of 50 cent
Equilibrium before tax 10b
Excise tax causes supply curve to shift up by amountof tax. so.so Sl
Excise tax causes supply curve to shift up by amount tax. SI so-so
Excise tax causes supply curve to shift up by amount of tax. so.so Sl so s
Excise tax causes supply curve to shift up by amountof tax. Sl
Excise tax causes supply curve to shift up by amountof tax. p so.so Sl so s
Excise tax causes supply curve to shift up by amount tax. so.so Sl
Excise tax causes supply curve to shift up by amount tax. SI so-so
Excise tax causes supply curve to shift up by amount tax. so.so Sl $0 -so
Excise tax causes supply curve to shift up by amount tax. Sl so-so
Excise tax causes supply curve to shift up by amount of tax. so.so SI
Excise tax causes supply curve to shift up by amount tax. Sl
Excise tax causes supply curve to shift up by amount tax. so.so SI
Excise tax causes supply curve to shift up by amount tax. $0.so Sl
Price rises by LESS than the amount of tax.
Price rises by LESS than the amount of tax. $0 so 10b
Price rises by LESS than the amount of tax. 10b
Price rises by LESS than the amount of tax. $0 so $1.20 $0.20 8b 10b
Price rises by LESS than the amount of tax. $0.20 8b $0.50 10b
Price rises by LESS than the amount of tax. $0.20 $0 so 10b
Price rises by LESS than the amount of tax. $0.20 10b
Price rises by LESS than the amount of tax. $0.20 $0 so 10b
Price rises by LESS than the amount of tax. .20 $0.20 10b
Price rises by LESS than the amount of tax. p $0.20 8b $0 so 10b
Price rises by LESS than the amount of tax. .20 $0.20 $0.50 10b
Price rises by LESS than the amount of tax. $0.20 $0 so 10b
Price rises by LESS than the amount of tax. $0.20 8b 10b
Price rises by LESS than the amount of tax. .20 $0.20 $0 so 10b
Price rises by LESS than the amount of tax. $1.20 $0.20 10b
Price rises by LESS than the amount of tax. $0.20 $0 so 10b
Price rises by LESS than the amount of tax. $0.20 8b 10b
Tax Burden is Shared by Consumers and Producers .20 receiw 30 cents less per
so-to Tax Burden is Shared by Consumers and Producers cents less per
Tax Burden is Shared by Consumers and Producers 30 cents less per 8b
Tax Burden is Shared by Consumers and Producers cents less per
Tax Burden is Shared by Consumers and Producers receiw 30 cents less per 8b
Tax Burden is Shared by Consumers and Producers cents less per
Tax Burden is Shared by Consumers and Producers receiw 30 cents less per
Tax Burden is Shared by Consumers and Producers Tax Burden
Tax Burden is Shared by Consumers and Producers Tax Burden Producer's T
Tax Burden is Shared by Consumers and Producers Tax Burden
Tax Burden is Shared by Consumers and Producers Tax Burden Producer's T
Tax Burden is Shared by Consumers and Producers Tax Burden
Tax Burden is Shared by Consumers and Producers Tax Burden Producer's T
Tax Burden is Shared by Consumers and Producers Tax Burden
When demand curve is steep consumers pay most of tax burden. tax burden
When demand curve is steep consumers pay most of burden.
When demand curve is steep consumers pay most of tax burden. tax
When demand curve is steep consumers pay most of burden.
When demand curve is relatively flat producers pay most of tax burden. tax
When demand curve is steep consumers pay most of tax burden.
When demand curve is steep consumers pay most of tax burden. tax tax burden
When demand curve is relatively flat producers pay most of tax burden. tax tax
When supply curve is steep producers pay most of burden. tax tax burden
When supply curve is relatively flat consumers pay most of tax burden. tax tax burden
To make consumers pay most of tax: Place tax on goods with steep demand or relatively flat supply. To make producers pavrn.QsiQf-iax:— Place tax on goods 1 supply or relativelyi
When supply curve is relatively flat consumers pay most of tax burden. tax
When supply curve is steep producers pay most of burden. tax burden
When supply curve is steep producers pay mostof tax burden. tax tax burden
When demand curve is relatively flat producers pay most of tax burden. tax tax
When demand curve is steep consumers pay most of tax burden. tax burden
When demand curve is steep consumers pay most of tax burden.
When supply curve is relatively flat consumers pay most of tax burden. tax
Demand and Supply (Continuation)
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