Mankiw's Principles of Microeconomics Chapter 8

1. How important do you think the concept of a deadweight loss to taxation is?  Why or why not?

Our founding father Benjamin Franklin once said “but in the world nothing can be said to be certain except death and taxes.”  Most of us view taxes as a necessary evil to achieve an organized society. However, have we ever drilled down further and considered the actual cost of the tax? When a product or service is taxed both the buyer and seller share in that cost. The true equilibrium price isn’t what’s paid or received, instead the equilibrium shifts and buyers pay more while sellers receive less. The question of what’s lost in the process is considered deadweight loss. Deadweight loss should be considered an important concept because in the end, people respond to incentives and the taxation of products and services negatively impacts the free market, therefore changing the behaviors of the consumer or supplier.

2. Should politicians and other taxing authorities consider deadweight loss when making their decisions?

When taxation policies are developed, one of the factors the government considers is the type of product being taxed. They ask the question, is this product elastic or inelastic in the demand & supply? Consider for a moment that the government started to tax all smart phones. I don’t know about you, but I consider my smart phone a rather inelastic product from my personal demand perspective. As you can see below in figure 1, on a macro level, while prices may changes substantially due to the imposed tax, products with inelastic demand maintain their quantity sold at a significantly better rate than products with elastic demand which results in a lower amount of deadweight loss. The goal of any taxation policy is to minimize the impact to the free market; consequently our government should consider deadweight loss when drafting tax policy.

  

Mankiw's Principles of Microeconomics Chapter 7

1.  Describe efficiency from the perspective of an economist?

It is by human nature that we strive to be the most efficient at what we do at all times. In some ways markets perform the same job; however, in an ideal world the principles of economics drive the results to equilibrium not so much the actions of an individual or organization. Efficiency can only be achieved if the market is free of externalities that cause market failure. Improper regulation in the marketplace can cause an inefficient allocation of resources. A good example of what lead to a market failure would be the market for mortgage backed securities prior to the housing collapse.  

2.  What was the most difficult concept in this chapter for you?  Why?

The section on Evaluating Market Equilibrium was rather confusing for me. Figure 8 in particular was difficult to grasp. I get the general concept that the supply of goods will be sold to the buyer that values them the most, and the seller’s who’s cost of goods is the lowest will have a higher producer surplus; however, I don’t understand point 3, “free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus. In my interpretation, I see the “social planner” in this example as Hugo Chavez. His economic policies regarding the supply of inelastic products would be an externality trying to influence the market in an effort to raise the economic well-being of his society.

Mankiw's Principles of Microeconomics Chapter 6

In April there was a flurry of blog posts from economists on price controls and inflation in Venezuela. Read this article from the Times: http://www.nytimes.com/2012/04/21/world/americas/venezuela-faces-shortages-in-grocery-staples.html?_r=1 .

How does this relate to the theories from the chapter? 

One of the ten principles of economics is that markets are a good way to organize economic activity. When the topic of price controls comes up, it is assumed by most economists that a competitive free market will utilize price as a means to ration. In the case of the Venezuelan government, while their intent was to make food affordable for the poor in a market where income disparities between the rich and poor were rather wide, price control actions actually caused suppliers to not be motivated by profit, which is counter intuitive to a capitalistic economy. 

In some cases, the imposed price controls caused suppliers to stop producing goods that had inelastic demand, goods that modern society views as necessities such as liquid milk. The situation was exacerbated when the Venezuelan government tried to correct the issue by increasing the supply of currency within the country, in effect increasing inflation at the rate of nearly 28% in a year.

Now consider a different case.  After Hurricane Katrina speculators brought in bottled water, but charged quite a lot for it.  What might have happened had price controls been imposed?  Where does the concept of fairness fit into this theory?

During Hurricane Katrina potable drinking water was in short supply, at the same time since this product is a necessity of life demand is constant. As with any inelastic product, the impact of price controls affects the black market for the product. A decrease in supply through normal sales channels leads to increased demand on the black market along with increased prices. If the government would have imposed temporary price controls on water it would have limited the black market since speculators would have had more competition. When we think about fairness in the potable water market during this hurricane, questions arise about the people’s right to products that are essential to life. In my opinion, setting price controls may have decreased the amount of civil unrest. Then again, drafting such laws is irrelevant unless they can be enforced even in times of extreme disaster.