Cost Benefit analysis L4 Distorted markets · Estimating the changes in social surplus gets complicated if the market is distorted · Examples of market distortion: 1. fixed supply 2. unemployed labour 3. purchasing from a monopolist 1) Market for electricity - diagram showing a fixed supply, a supply limit. Demand d0 is consumers d1 with gov demand also. Capacity is already exhausted - on an inelastic supply curve - intersection of demand and supply is market price - price increases from p1 to p2. Total change in social surplus: consumers decrease demand Producer surplus = gain Consumers surplus = loss Gov surplus = q2q0BC Why is quantity now at Q2? 2) Excess supply of labour. Opportunity cost of using labour. Market is efficient in diagram - minimum wage implemented - p1 - q2 workers want to get hired but only q1 get hired by firms - excess supply of labour - market distortion. Demand increases by gov - no. of people hired is now q3; higher amount. Change in social surplus is 0. No opportunity cost. Not a good measure = opportunity cost of unemployment - working at home with no income but involved in productive work - opportunity cost of going into gov project - no one willing to work for free - value leisure time. Opportunity cost is not 0. Second measure; total govt expenditure = change in SS = not a good measure. Willing to work at much lower prices, enjoy extra income they have, surplus transferred from gov to workers. Third measure - change in SS = - q1q3CD = also not 100% correct = only highlighted hired from gov between C and D, may not be case in reality, value leisure, gov might employ any of employers between E and F. SS4 average approach. Pr min wage at where someone will be willing to work - most appropriate to use - difficult to calculate needs to be an approximation. SS5 takes out Pr. The true opportunity cost is half of what the government has to spend on hiring these workers. 3) Does not reflect marginal cost of good, nor opportunity cost. Diagram shows MC and MR and demand. Intersection of MR and MC curves - revenue maximised. Produces Q0 and sells for price on demand curve. Maximises profits. Gov demands from monopolists - demand shifts up to d1 - MR shifts to MR1 - price increases and quantity increases. Intersection is further along the MC curve. New price is P1 to consume Q1 units. Change in social surplus: look at original demand curve - would only consume Q2 at p1 - increase in monopolist surplus - green area - consumers decrease in surplus = loss of surplus - yellow area. Red box = govt expenditure = loss in gov surplus. DWL.
Hiring unemployed labor · If market is efficient, market clearing ensures that there are no unemployed labor · Unemployed labor may exist in the presence of minimum wage laws, union bargaining, etc. · Government