Simple econ question

Factual Questions
1

Consider the basic market equilibrium graph. A government action completely removes a subset of buyers and sellers, moving the respective curves in accordingly. Plotting the new equilibrium price/quantity on the original graph, you can see the amount of somevocabwordI’veforgotten caused by the government’s actions. The loss is the area under the sometriangleIcan’tremember.

I know there’s a synonym for somevocabwordI’veforgotten, but I can’t remember it. I keep thinking of deadweight loss, but I associate that with tax issues. In this case, the gov is simply pointing its finger at a region and saying – no more!

Also, I can’t remember the proper geometrical shape of a sometriangleIcan’tremember. I think it is a horizontal line from New EQ to below the Old EQ forming the legs with a line between the points forming the hypotenuse. But does it drop all the way to the X-axis? That would be an integral, no?

Thanks!

Rhythmdvl

2

someanswerIcan’tremember

3

Seriously, can you be more specific? Can you give an example of government action removing buyers AND sellers? Or did you mean discourage through tariffs, taxation, etc?

4

Whoops sorry. And did you mean an isosceles triangle?

5

The ecom majors I’ve met have problems dealing with lines let alone Calculus. Are you sure about integrals?

6

It’s still a dead weight loss, if I understand you correctly.

I don’t remember the triangle having a specific name.

I’ve got Macro 3102 this semester, starts next week, I’ll look it up for you.

7

If you are talking about government spending taking up too much of the market I believe the term is called “crowding out.”

If you are talking about that government action taking the form of a tax, tariff, or quota then the term is “deadweight loss.” Which is all of the lost gains from trade resulting from fewer people being able to purchase the good as well as the lost savings for those who do purchase it.

8

**

Removing buyers and sellers through tariffs or quotas is relatively straightforward. Quotas have the direct effect of prohibiting foreign sellers from participating in domestic markets, which in turn removes buyers by perpetuating an artifically high price. Tariffs remove sellers by making their costs artificially high, which in turn lowers the supply and (you guessed it) removes buyers.

Given your last question I realize that you probably already understood this KidCharlemange. I don’t know if it was necessary however, because tariffs, taxes and quotas are government actions.

The case of crowding out really has more to to with government purchases causing the interest rate to increase which causes investment to decrease.

9

Maybe your school is just full of nitwits :wink:

Us real economists use advanced calculus and linear algebra constantly, at the very least in dealing with statistics but as well in their own rights. Any kid with a bachelor’s degree in economics should at the very least be able to understand partial derivatives, since they’re used to evaluate simple Cobb-Douglass production functions which are, in turn, typically introduced in intermediate-level undergrad microeconomics courses.

And for the OP, yes, as best as I understand the question, the answer is “dead-weight loss.” And yes, integrals are usually employed in evaluating dead-weight loss, whether they “drop down to the x-axis” or not. If they don’t, then it’s the difference of two integrals…

10

Thanks – deadweight loss it is.

The paper I’m working on is based on tradable emission permits. The Kyoto Protocol allows them per Articles six, twelve, and seventeen. The Marrakech Accords are structured such that a noncompliant country is barred from participating in international trading. A very small section of my paper is going to point out the possible affects on the overall market. I realize that an entire paper could be written on just that, but it not my main focus.

As for the area of the deadweight loss, is it just the triangle between the two points and the lower point’s Y-axis or does it continue all the way to the bottom of the graph?

11

I’m sort of beginning to understand the question, but only barely :stuck_out_tongue:

Here’s a question first: what precisely are you trying to model here? The market for tradeable emission permits? What is the basic economic model (perfect competition, monopolistic competition, pure monopoly, etc) you’re fitting here? I’m not arguing the aptness of the model, but I don’t know for sure what we’re using. It seems to be you’re implying a perfect competition model.

Now, here’s what “dead-weight loss” is: it’s surplus value lost when a market is operating at less than optimal conditions. By definition, any of the value below a supply curve is not surplus. That’s just trade. Dead-weight loss is the sum of consumer and producer surplus that is lost, and never includes the sum total of trade that is lost. If we’re talking about dead-weight loss due to competitive monopoly, it is evaluated as the difference between the marginal cost curve and the demand curve, bound between the intersection of the marginal cost and marginal revenue curves and the intersection of the marginal cost curve and the demand curve.

Man, this is hard without a chalk board… I’m sure it’s even harder to understand! I think the short answer is, it’s “just the triangle.” If we took it all the way down to the x-axis, we would be including simple one-for-one trade, which is of no interest to economists any more than dividing two sides of an equation by six is of interest to mathematicians. What you’re trying to show (I think!) is that there is surplus value being destroyed by agents outside of your market, which is a no-no. Whether or not this is actually true in your specific case is a debate of great proportion…

12

Probably right desdinova or more likely my school had competent econ majors and I just never met them.

Have always been interested in econ. I have taken macro econ and that’s it for undergraduate. Weird though in that I took a graduate level econ course ‘for fun’ and found it not too hard. The econ people in the class were groaning in pain. The course was very math intensive which was just fine by me :slight_smile:

It seems that if you have a good background in math, one can do well in econ. It was extremely interesting and, while taking the class, had real doubts that I missed my calling and should have pursued it.

13

desdinova has it right, it’s just the triangle that’s deadweight loss (aka welfare cost or excess burden in the case of taxes). Of course in real models it’s not a triangle because neither demand nor supply are typically straight lines.

What is this triangle? At any point, the area under the (compensated) demand curve measures consumers valuation in terms of dollars. The area under the supply curve measures the cost of producing different amounts of output (ignoring certain costs which economists don’t think count). If there are no costs or benefits unpriced by the market, the intersection of demand and supply is the output which maximises the difference between total benefits and total costs.

A departure from that point reduces net benefits. Reducing production reduces consumer surplus but it also saves some resources which can be put into other valuable (even though less valuable activities). That’s why the loss does’t go all the way to the axis.

Possibly andymurph64’s judgement of economists’ maths abilities was based on one of our notorious shorthands - my favorite being “rectangles are bigger than triangles” which sounds stupid but isn’t.

14

My paper proposes an alternate set of sanctions to those called for under the Marrakech Accords. One of Marrakech’s sanctions on a noncompliant country (one that does not meet its reduction targets, among other things) is to make it ineligible to buy or sell permits internationally. A medium sized section of my paper is a general critique of the entire set of sanctions, and a small part deals exclusively with the exclusion of noncompliant countries. Within that, I would like to address possible affects on the market as a whole as certain nations are removed from trade. I will recognize that the precise effects are unknowable without the market’s functioning in the first place, nor without knowing the number or proportions of buyers and sellers removed from the market. However, within the confines of this small section (as I said, this whole thing could be turned into a paper itself) I would like to offer a simple case.

Therefore, I am starting out with the theoretical perfect market – one with single aggregate supply and demand curves forming nice, straight lines. Very econ 101ish - graph one. Graph two will be the removal of sellers, shifting in the supply curve. Graph three will be the removal of the buyers. Graph four will be the aggregate of the two. I’ve constructed them such that there is a relatively steep slope to the supply curve, though not enough to bring elasticity into the discussion. It is merely steep enough so that the final graph has an equilibrium point far enough below and to the left of the original e.p. so that the change is visually apparent.

I’d like to shade that area of the graph that represents missed opportunity and know what to call it. It seems like deadweight loss fits the description, but I am still not clear as to where the shading can go. A chalk board would be helpful indeed!

15

OK, does Part II Question 2 look familiar to you?

16

Okey-dokey, I think I’ve got it, but it’s gonna be rough going to do this without visual aids…

First off, I should clarify that I’m operating under the assumption that our x-axis is quantity, and our y-axis is price. Standard econ notation, but it riles mathematicians so I thought I’d make sure.

Now, we’ve got two supply curces and two demand curves. The pre-regulation ones I’ll call S1 and D1 respectively, and the two contracted ones I’ll call S2 and D2. Pre-regulation equilibrium price will be P1, and quantity gets called Q1, with the contracted equilibria being P2 and Q2.

The “welfare” that is lost here has four boundaries:

Q2 is the left boundary.
S1 is the right boundary.
P2 is the bottom boundary.
D1 is the top boundary.

This is total dead-weight loss.
BUT, both producers and consumers lose out here! Everything in the dead-weight loss area I’ve just defined that is above P1 is lost consumer surplus, and everything below it is lost producer surplus.

Now, all of this being said, I would encourage you to think long and hard whether or not this model “makes sense” in describing the market for tradeable emissions permits. I’m not saying it’s something you should or shouldn’t put in a paper, but I would encourage you to just think about what supply and demand curves for emissions permits ought to look like and why.

Hawthorne, I always figured it was our long-standing insistence on plotting dependent variables on the x-axis :stuck_out_tongue:

17

A synonym for “deadweight loss triangle” is “welfare loss triangle”.

Apropos nothing, Harberger (?) showed that welfare loss triangles can be surprisingly small, in the antitrust context.

Within the pollution context, permit me to present a model:




  .           
 P.           
  .                        MD
  . x                     x
  .   x                 x
  .     x             x
  .       x         x
  .         x     x
  ..          x x
P1.           x x     DWL
  .        x      x
  .      x          x
  .    x              x
  .  x                  x   MB
P0 .x_____________________ x__________________
               E1             E0       Emissions

Above, I try to indicate the CO2 emissions over a wide area - perhaps the US or the world. Damages per initial ton of C02 increase as the stock of CO2 increases in the atmosphere. So MD is an increasing curve. Emissions reductions are cheaper in the beginning, then get more expensive. So the marginal benefits of an additional ton of CO2 emitted decline.

If there were a market in CO2 emissions, that is, if those suffering damages from global climactic change could charge the users of fossil fuels (for example), the price would settle at P1. Alas, there is no market in CO2 (yet) so the price is at P0. In other words, you can emit CO2 for free.

In the absence of a tax on CO2 emissions, the free market will emit E0. A tax of P1 would cause a decline in emissions to E1.

Now for your question. The total benefit enjoyed by emitters of pollution is indicated by the area under the MB curve. The total losses from this is indicated by the area under the MD curve. Here, the dead weight loss is rather large (mainly because P1-P0 is large). It is the triangle MD-MB-“those 4 Xs in the middle of the diagram”.

OK, actually that wasn’t your question. It appears that you want to know what happens when there is some emissions reduction, but less than is optimal. To work that out, find a point between E0 and E1 and draw a line upwards. The resulting triangle is the “Welfare loss triangle from insufficient emissions reduction”.

Of course, you can also complicate matters by drawing a couple of interacting diagrams that model different regions of the world (eg, “the US” and “everyone else”). But let’s leave it here for now.