Please view the link below for a discussion on taxes and subsidies. You may have to copy and paste to the search bar/field to bring it up.

www.youtube.com/watch?v=LTFxRlACebk

What is your analysis based on text and lecture notes?

3 Lecture: The "3 S's": Surplus, Shortages, and SubsidiesHi Guys!

For those of you who have completed the lessons, BRAVO! Good job on the homework assignments, responses, etc. The material may seem a bit difficult to master at first, but it seems as though many of you have a grasp of the subject. Now to move on...

Review:

In our previous lesson, we discussed how supply and demand actually -through market equilibrium- intersected whereby the "clearing price"-remember the "x"- reflected just as many consumers (those demanding the good or service) willing to buy, as there were suppliers (those selling whatever is needed) willing to sell.

Any point above the equilibrium of supply and demand -the "X"- would result in either a SURPLUS of goods on the market; or, if the price was below equilibrium, a SHORTAGE of goods...

In our homework assignment we will analyze the effects of minimum wages on teenage unemployment. This is a rather controversial discussion because, on one hand, we want to employ un-skilled labor, but those who need the labor will not necessarily pay a price above prevailing market wages.

Think of it this way: theoretically, in the absence of govt. intervention, those un-skilled teenagers looking for work would be able to contract their labor with a willing buyer (a business looking to employ un-skilled workers) who, in turn, would negotiate with the potential employee at a price. If neither party agreed to the wage, fine. They both go their separate ways. But if they did agree, and other contractors for labor and suppliers of labor in the marketplace were free to negotiate, the market would achieve equilibrium.

However, when government mandate sets wages above equilibrium, you have more teenagers (with few skills, mind you) looking for work;

"Hey, why should I go to automotive class at 2 when I can go and get a job because they just raised the minimum wage?"

Employers are saying: "Hey, why should we employ these low skilled 'kids' at a price above what they are truly worth? We've got overhead (expenses) that are already costing us a lot. Forgetaboutit, let them go back to shop class. I hear it starts at 2..."

...and there you have the problem. So many teens want to work creating a surplus of labor; so few employers want to hire reducing the quantity demanded for labor.

Lastly, given the stimulus checks and somewhat generous unemployment benefits due to the COVID pandemic, employers are having difficulty in some regions of the United States attracting workers because workers receiving these benefits would rather stay home and not work! Let us hope this is a short-term phenomenon for an economy cannot sustain itself (at least a capitalist economy, which WE HOPE to SUSTAIN) for very long if productivity gains brought about through labor and capital employed together are non-existent.

Ok! Not too bad, huh? Let's look at the example of a shortage of a commodity (a good that has easily discernable characteristics that is traded quite often: a commodity)

Shortage

Suppose the High Desert community experienced an economic boom! Job creation leading to higher property values; a metro rail from Los Angeles (I'd love that...); more outlets, restaurants, etc. Basically, an increase in the overall standard of living.

As a result, YOU begin to purchase real estate (aka: real property) and rent out several units to your neighbors. You charge, let's say, for a 3 bedroom apartment $1,200 per month based on information gathered on the going rates for apartments. Similarly, the rents charged by most landlords for a 3 bdrm apt. are about the same if not higher.

For awhile you're doing pretty well (imagine owing 3 buildings with 4 unit's each-YAHOOO!!!) BUT.....the city council decides to make rents "more affordable" thereby decreeing that 3bdrm units could only charge $900 per month. "Hey," you say to yourself, "that's not fair. I busted my tail to buy those units and I should get what the market is willing to pay..." Unfortunately, class, this happens in our society. It is called rent control.

For altruistic reasons (although economically wrongheaded) local politicians pass such ordinances. What are the effects?

First, because the rents are below equilibrium levels the quantity demanded increases. Correspondingly, the quantity supplied decreases. No, apartment buildings are not demolished, but landlords either take some units "off-line" by using them as storage facilities (disgruntled because they can't get market rates...), or maintenance falls off because there is no economic incentive -market rents. Therefore, why "spruce it up" when you can't get back your investment?

"But Ramon, people have got to have a place to live...you're cruel, man!"

Got that out of your system? Good. Let's move on.

Renters do not fare much better, either. You see because of the SHORTAGE created when rent controls are imposed, landlords become very, very, very, selective to whom they rent. Wouldn't you? "Heck, I can't get what the place is worth; I'm darn sure going to rent to somebody with good references, credit, no dogs, no kids, no ferrets, or skunks, or baby skunks, skunks of skunks...you get the picture.

Meanwhile, would-be renters are on waiting list, hoping to get that "dream" apt. at the rent controlled rate. In essence, a queuing effect takes place (just like standing in line at the super market); yep, you got to wait your turn! And when that maybe is anyone's guess.

Now, do not think I live in an ivory tower...as a student appreciating the good life (like I tried to do, but was constrained by something, oh yeah, called MONEY) I would have loved, loved, loved, to live in RENT CONTROLLED Santa Monica, CA as it was during the 80s. Beautiful views, beaches, etc. But who, ultimately, was paying the price?

Answer: the landlord who couldn't receive market rents; those inhabitants of Santa Monica who witnessed the dilapidation of apt. buildings-eye soars- in other words- and, if you think about it, there was no incentive to build other units which would have forced prices down anyway, maybe even below the "controlled" rate. Hmmmm....

Also, would be renters are paying an economic cost in terms of the amount of time spent trying to get a rent controlled unit ( opportunity costs...meaning they are spending time and effort in this ill fated pursuit when they could be engaged in some more profitable opportunity) and "search costs" in terms of travel related expenses incurred in their pursuit of an apt. Many economists would deem these costs as contributing to "inefficiencies" in the market brought on by rent controls.

Local governments throughout the United States imposed rent controls often during the last century. Seen as a way to keep rents down and help the poor during World War II, New York city imposed such controls. Some places in New York still have them, and get this: it isn't always the poor (if they're lucky enough to get in to a rent controlled unit) that benefit from such controls. Often it is the RICH.

That's right. Those members of society who could otherwise pay what the market will bare get subsidized. How? A lot has to do with if the rent controlled unit was left to you (which sometimes happens at the expense of the family needing a place to live), or, if you know the landlord, well....you get the picture.

Subsidies

Unlike a tax, a subsidy is a cost not borne by the consumer (demand) or provider ("supplier"), but the government. It functions this way, the government allows the seller (supplier) to provide the service or good at what is generally above the market equilibrium price while, simultaneously, the quantity demanded is greater than the quantity available at the market clearing price. "What the deuce?" said Stewie from Family Guy. Governments engage in such activities in order to make certain items (like college tuition) more affordable. Or like in the case of the Earned Income Tax Credit, provides the employer the funds to pay a higher wage -no cost to the employer- in turn, the employer can now hire more lower income workers at a more sustainable, living wage.

Graphically, visualize a triangle created out of the equilibrium of price and quantities supplied and demanded whereby there's an upper most point (dot) on the supply curve and a lower point (dot) on the demand curve. That "area," if you will, represents a "wedge" or the subsidy provided by the government. You can calculate the value (cost) of the subsidy by taking the price point (dot) on the supply curve and multiply by the amount of quantity demanded (dot) on the demand curve.

Think of the wedge this way: suppliers- on the supply curve-will provide the MAXIMUM amount of quantity because they KNOW the government will pay the price; consumers - on the demand curve- will desire as MUCH as possible because for them, they pay below the market rate.

Think of our friends on SECTION 8, the govt rental subsidy program. The landlord charges the govt $1,250 and the tenant pays $450; the landlord makes out like a bandit; of course, she has to "fix" the unit if the tennant thrashes the place...which often occurs, so she better save the money! And the Tennant gets a unit at an affordable price.

Lastly, recall, there's NO SUCH THING AS A "FREE LUNCH" IN ECONOMICS (OR LIFE, FOR THAT MATTER), so it's the government paying the cost. "Fine," you may say, but due to the fact that resources are FINITE and not INFINITE, monies for such subsidies must come from other sources: cuts to other programs through fiscal reallocation, or tax hikes to pay for them.