Chapter 9: Public Onwership (page 327)
How did successive UK governments use public ownership?
regulate market power
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Suppose the market for widgets can be described by the following equations:
Demand: P = 10 - Q
Supply: P = Q – 4
where P is the price in dollars per unit and Q is the quantity in thousands of units. Then:
a. What is the equilibrium price and quantity?
b. Suppose the government imposes a tax of \(1 per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? Whatamount per unit will the seller receive?
c. Suppose the government has a change of heart about the importance of widgets to the happiness of the American public. The tax is removed and a subsidy of \)1 per unit is granted to widget producers. What will the equilibrium quantity be? What price will the buyer pay? What amount per unit (including the subsidy) will the seller receive? What will be the total cost to the government?
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?
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.
Explain the four policies related to Privatisation.
In Example 9.1 (page 332), we calculated the gains and losses from price controls on natural gas and found that there was a deadweight loss of \(5.68 billion. This calculation was based on a price of oil of \)50 per barrel.
a. If the price of oil were \(60 per barrel, what would be the free-market price of gas? How large a deadweight loss would result if the maximum allowable price of natural gas were \)3.00 per thousand cubic feet?
b. What price of oil would yield a free-market price of natural gas of $3?
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