Welfare Analysis of Market Equilibrium

In this section, we focus on the agent's ability to evaluate welfare implications of various forms of market equilibrium, particularly how different policies and distortions impact overall efficiency and resource allocation. The agent is tested on their understanding of how different interventions—such as taxes, subsidies, and price controls—affect welfare outcomes, and their ability to distinguish between distortionary and non-distortionary policies.

Elements

1. Capital Market Distortions

   Computing how a tax on the return to capital, compounded over several years, lowers the capital stock and output.

2. Consumer Surplus

   Computing consumer surplus from a linear inverse demand curve at a given price.

3. Producer Surplus

   Computing producer surplus from a linear supply (marginal cost) curve at a given price.

4. Efficient Surplus

   Computing total surplus at the competitive equilibrium of linear demand and supply.

5. Deadweight Loss of a Monopoly

   Computing the deadweight loss of monopoly pricing relative to the competitive outcome.

6. Labor Supply Distortions

   Computing how a labor income tax changes hours worked, labor supplied, or the labor-market equilibrium.

7. Irrelevance of Tax Incidence

   Recognising that a per-unit tax has the same effect on prices and quantity whether sellers or buyers are legally required to pay it.

8. Identify Non-Distortionary Taxes

   Picking the tax that raises revenue without a deadweight loss: a lump-sum or fixed-factor tax among distorting ones, or a per-unit tax in a market with fixed supply.