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Chapter 9: Privatization (page 327)
Why have recent successive UK governments prefferred a PFI over PPPs?
Advantages in borrowing, solving fiscal issues and spending.
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In 1983, the Reagan administration introduced a new agricultural program called the Payment-in-Kind Program. To see how the program worked, let鈥檚 consider the wheat market:
Suppose the demand function is QD = 28 - 2P and the supply function is QS = 4 + 4P, where P is the price of wheat in dollars per bushel, and Q is the quantity in billions of bushels. Find the free-market equilibrium price and quantity.
Now suppose the government wants to lower the supply of wheat by 25 percent from the free-market equilibrium by paying farmers to withdraw land from production. However, the payment is made in wheat rather than in dollars鈥� hence the name of the program. The wheat comes from vast government reserves accumulated from previous price support programs. The amount of wheat paid is equal to the amount that could have been harvested on the land withdrawn from production. Farmers are free to sell this wheat on the market. How much is now produced by farmers?How much is indirectly supplied to the market by the government? What is the new market price? How much do farmers gain? Do consumers gain or lose?
Had the government not given the wheat back to the farmers, it would have stored or destroyed it. Do taxpayers gain from the program? What potential problems does the program create?
About 100 million pounds of jelly beans are consumed in the United States each year, and the price has been about 50 cents per pound. However, jelly bean producers feel that their incomes are too low and have convinced the government that price supports are in order. The government will therefore buy up as many jelly beans as necessary to keep the price at \(1 per pound. However, government economists are worried about the impact of this program because they have no estimates of the elasticities of jelly bean demand or supply.
a. Could this program cost the government more than \)50 million per year? Under what conditions?Could it cost less than \(50 million per year? Under what conditions? Illustrate with a diagram.
b. Could this program cost consumers (in terms of lost consumer surplus) more than \)50 million per year? Under what conditions? Could it cost consumers less than $50 million per year? Under what conditions? Again, use a diagram to illustrate.
In 2011, Americans smoked 16 billion packs of cigarettes. They paid an average retail price of \(5.00 per pack.
a. Given that the elasticity of supply is 0.5 and the elasticity of demand is -0.4, derive linear demand and supply curves for cigarettes.
b. Cigarettes are subject to a federal tax, which was about \)1.00 per pack in 2011. What does this tax do to the market-clearing price and quantity?
c. How much of the federal tax will consumers pay? What part will producers pay?
A particular metal is traded in a highly competitive world market at a world price of \(9 per ounce.
Unlimited quantities are available for import into the United States at this price. The supply of this metal from domestic U.S. mines and mills can be represented by the equation QS = 2/3P, where QS is U.S. output in million ounces and P is the domestic price.
The demand for the metal in the United States is QD = 40 - 2P, where QD is the domestic demand in million ounces.
In recent years the U.S. industry has been protected by a tariff of \)9 per ounce. Under pressure from other foreign governments, the United States plans to reduce this tariff to zero. Threatened by this change, the U.S. industry is seeking a voluntary restraint agreement that would limit imports into the United States to 8 million ounces per year.
a. Under the $9 tariff, what was the U.S. domestic price of the metal?
b. If the United States eliminates the tariff and the voluntary restraint agreement is approved, what will be the U.S. domestic price of the metal?
What is the inverse relationship in the demand for labor curve?
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