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Chapter 9: Public Ownership (page 327)
What does the term "nationalization" mean?
a government publicly acquiring an asset
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From time to time, Congress has raised the minimum wage. Some people suggested that a government subsidy could help employers finance the higher wage. This exercise examines the economics of minimum wage and wage subsidies. Suppose the supply of low-skilled labor is given by
LS= 10w
where, LS is the quantity of low-skilled labor (in millions of persons employed each year), and w is the wage rate(in dollars per hour). The demand for labor is given by
LD= 80 - 10w
a. What will be the free-market wage rate and employment level? Suppose the government sets a minimum wage of \(5 per hour. How many people would then be employed?
b. Suppose that instead of a minimum wage, the government pays a subsidy of \)1 per hour for each employee. What will the total level of employment be now? What will the equilibrium wage rate be?
Example 9.6 (page 353) describes the effects of the sugar quota. In 2016, imports were limited to 6.1 billion pounds, which pushed the domestic price to 27 cents per pound. Suppose imports were expanded to 10 billion pounds.
a. What would be the new U.S. domestic price?
b. How much would consumers gain and domestic producers lose?
c. What would be the effect on deadweight loss and foreign producers?
In 1983, the Reagan administration introduced a new agricultural program called the Payment-in-Kind Program. To see how the program worked, let’s consider the wheat market:
Suppose the demand function is QD = 28 - 2P and the supply function is QS = 4 + 4P, where P is the price of wheat in dollars per bushel, and Q is the quantity in billions of bushels. Find the free-market equilibrium price and quantity.
Now suppose the government wants to lower the supply of wheat by 25 percent from the free-market equilibrium by paying farmers to withdraw land from production. However, the payment is made in wheat rather than in dollars— hence the name of the program. The wheat comes from vast government reserves accumulated from previous price support programs. The amount of wheat paid is equal to the amount that could have been harvested on the land withdrawn from production. Farmers are free to sell this wheat on the market. How much is now produced by farmers?How much is indirectly supplied to the market by the government? What is the new market price? How much do farmers gain? Do consumers gain or lose?
Had the government not given the wheat back to the farmers, it would have stored or destroyed it. Do taxpayers gain from the program? What potential problems does the program create?
How did successive UK governments use public ownership?
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.
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