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Chapter 9: Public Ownership (page 327)
What is 1 advantage of public ownership?
economies of scale
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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 Exercise 4 in Chapter 2 (page 84), we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of \(9 per pound. U.S. domestic supply and demand for various price levels are shown in the following table.
Price | U.S. Supply (Million Pounds) | U.S. Demand (Million Pounds) |
3 | 2 | 34 |
6 | 4 | 28 |
9 | 6 | 22 |
12 | 8 | 16 |
15 | 10 | 10 |
18 | 12 | 4 |
Answer the following questions about the U.S. market:
a. Confirm that the demand curve is given by QD = 40 - 2P, and that the supply curve is given by QS = 2/3P.
b. Confirm that if there were no restrictions on trade, the United States would import 16 million pounds.
c. If the United States imposes a tariff of \)3 per pound, what will be the U.S. price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss?
d. If the United States has no tariff but imposes an import quota of 8 million pounds, what will be the U.S. domestic price? What is the cost of this quota for U.S. consumers of fiber? What is the gain for U.S. producers?
Explain the four policies related to Privatisation.
Currently, the social security payroll tax in the United States is evenly divided between employers and employees. Employers must pay the government a tax of 6.2 percent of the wages they pay, and employees must pay 6.2 percent of the wages they receive. Suppose the tax were changed so that employers paid the full 12.4 percent and employees paid nothing. Would employees be better off?
The domestic supply and demand curves for hula beans are as follows:
Supply: P = 50 + Q
Demand: P = 200 - 2Q
where P is the price in cents per pound and Q is the quantity in millions of pounds. The U.S. is a small producer in the world hula bean market, where the current price (which will not be affected by anything we do) is 60 cents per pound. Congress is considering a tariff of 40 cents per pound. Find the domestic price of hula beans that will result if the tariff is imposed. Also compute the dollar gain or loss to domestic consumers, domestic producers, and government revenue from the tariff.
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