Economic Policies and Efficiency:
Exercises and Applications
Lecture 6 – academic year 2014/15
Introduction to Economics
Fabio Landini
Ex. 6.1 – The market for cigarettes
If the equilibrium price on the market for
cigarettes is equal to 10 Euro a packet, and the
State imposes a MINIMUM price equal to 12
Euro, we have…
A) … An excess supply: the quantity supplied is
greater than the quantity demanded.
B) ... Scarcity: the quantity demanded is greater
than the quantity supplied.
C) ... No effect on the market.
Ex. 6.2 – Tax on petrol (I)
Question
The European Parliament decides that the EU must
decrease the level of air pollution by reducing the use
of petrol in road transports. Therefore, it introduces a
tax on petrol of 0.50 € a litre.
Should the EU introduce a tax on consumption or
production? Explain in detail by using a graphical
representation (S&D model).
Ex. 6.2 – Tax on petrol (II)
Question
If the demand for petrol were more elastic, would
this tax be more or less efficient in reducing the
quantity of petrol that is consumed?
Explain in detail by using a graphical
representation (S&D model).
Ex. 6.2 – Tax on petrol (III)
Question
Do the consumers of petrol obtain some
benefits from the introduction of the tax?
Do the workers of the petrol industry obtain
some benefits from the introduction of the tax?
Ex. 6.3 – Tax and prices
Question
Two market equations:
QO = 2P
QD = 12 – P
a) Find the equilibrium price and quantity;
b) What happen if the Government imposes a
tax T on producers?
Ex. 6.4 – More on cheese market (I)
Question
Two market equations:
QD = 9 – P
QS = 3P – 3
Compute the surplus of the consumer and the
surplus of the producer in equilibrium.
Ex. 6.4 – More on cheese market (II)
Question
The government decides that the price of cheese
that is determined on the market is too low.
Suppose that the Government introduces a
minimum price.
Draw the S&D graph and show the effect of such
policy on the market price and on the quantity sold.
Does this intervention induce scarcity or excess
supply?
Ex. 6.5 – More on cheese market (III)
Question
The farmers of a given country complains that
the imposition of the minimum level of price on
cheese has reduced their total revenue.
Is it possible? Explain why.
Ex. 6.4 – More on cheese market (IV)
Question
In response to the farmers’ complaints, the
Government to buy all the excess supply of
cheese from farmer at the limit price. In
comparison with the introduction of the
minimum price,
a) Who benefits from this new intervention?
b) Who is damaged?
Ex. 6.5 – Lemonade
Question
The (usual) chilling destroys part of the lemon
harvest in Sicily.
a) Which is the effect on the consumer
surplus in the market for lemonade?
b) What happen to the surplus of the
lemonade producers?