Markets and Economics of Public Sector
In Week 2, students will employ the supply and demand model to develop consumer surplus and producer surplus as a measure of welfare and market efficiency. Students learn about welfare economics–the study of how the allocation of resources affects economic well-being–and will discover that under most circumstances, the equilibrium price and quantity is also the one that maximizes welfare. Students will review different sources of externalities and a variety of potential cures and will see that while markets are usually a good way to organize economic activity, governments can sometimes improve market outcomes. Students will see how the U.S. government raises and spends money and the difficulty of making a tax system both efficient and equitable.
Scenario: You have been assigned to a team that has the responsibility of preparing a paper for the governor’s next economic conference.
Prepare a 1,050-word paper addressing the following:
Explain why equilibrium of supply and demand is desirable.
Explain the following concepts using the concept of consumer and producer surplus:
Efficiency of markets
Costs of taxation
Benefits of international trade
Discuss how externalities may prevent market equilibrium and the various governments policies used to remedy the inefficiencies in markets caused by externalities.
Analyze the difference between the efficiency of a tax system and the equity of a tax system as it refers to the costs imposed on taxpayers using the benefits principles.
Cite a minimum of three peer-reviewed sources, not including your textbook.
Format consistent with APA guidelines.
Markets and Economics of Public Sector
One area of discussion in microeconomics is the dynamics of markets and the economics of the public sector. This paper transcends a discussion of the why the demand and supply equilibrium is desirable, an explanation of the market efficiencies, taxation cost, and the advantages of global trade. Also, the paper will analyze the consequences that hinder market equilibrium and the government’s intervention in the markets as an antidote to market inefficiency caused by externalities. Lastly, the paper will address the differences between the efficiency of the tax system and the equity of the tax system.
Why Equilibrium of Supply and Demand Is Desirable
First, we need to understand the logic behind the desirability of the equilibrium of demand and supply. Mankiw (2014, p. 65) suggests supply and demand conditions regulate the pricing and quantity of goods which are sold, and they work mutually within the competitive markets. He defines the market as a “group of sellers and buyers” who dictate the supply and demand of a product. These markets exhibit sustainable growth when supply and demand curves overlap, “equilibrium,” where there is equality of amount of goods supplied, and quantity of goods demanded. This point is not static and it subject to change with the dynamics of the market. Bessetto (2005) suggests that a competitive equilibrium can be implemented if the government acts in a way to make the equilibrium outcome inevitable. As such, equilibrium is desired because it benefits sellers as well as buyers. This phenomenon dictates that when the price is at equilibrium, the customers can receive a bargain because they can purchase at a higher price. Alternatively, sellers will be willing to sell at a lower price since the marginal cost of a product is less that the market price.
Efficiency of markets
Market efficiency can be defined as a measure or parameter of availability of information on the market that offers the buyer unlimited opportunities and enables the seller to effect business transactions at the minimum cost. Market efficiency commonly referred to as “competitive market” allows the consumer and the seller to agree on a price that achieves efficiency despite competition and market absence. Market efficiency is attainable when there is equilibrium between supply and demand. For the buyer, at equilibrium, they can satisfy their wants and needs at the demand price which they are willing to pay for a given product. On the other hand, the price at equilibrium gives sellers the lowest price that they can supply a product. This price is said to be the value of the products not produced as in occurs at the opportunity cost equal to the satisfaction surrendered from the products foregone. As such, Mankiw (2005) suggests that when the market is efficient, it is unfeasible to increase the value of a product and its satisfaction by producing additional quantities of one good than the other.
Costs of Taxation (150 words)
Mankiw (2005) suggests that the costs of taxation encompass the revenue received by the government, the loss of surplus (consumer and producer surplus) initiated by tax, and the administration cost of tax codes. Taxes compensated by the supplier or producer shifts the supply curve by the respective tax amount (Varian, 2014). The government operations do not entirely need taxation, but for markets to work efficiently, it needs government intervention, as such, tax rates depend on the products and services the government offers. Consequently, welfare economics dictates that the allocation of resources impacts the economy. Hence, market equilibrium maximizes the entire welfare of market participants. Arguably, the “deadweight loss of taxation” significantly affects the economic well-being of buyers and sellers (Mankiw, 2005).
Benefits of International Trade
International trade entails exchange or resources, products, and services produced in various nations globally. Some goods and services are offered on the international market. Therefore consumers and buyers can discover new markets due to the dynamics of international trade. Also, nations taking part in international trade helps to increase their GDP as they will engage in more production activity. Furthermore, international trade foster competition which allows for better services and products. To add on, international trade allows for the peace and harmony between the participant countries as well as an appreciation of different cultures. Lastly, engaging in international trade allows countries to participate in the export and import trade which consequently initiates moves to improving products and services offered by firms to be having a competitive advantage (Baumol & Blinder, 2015).
Externalities and market Equilibrium
Positive and negative externalities presence result in failures when obtaining market equilibrium since the actual benefits and costs of a service or product cannot be represented as their primary imprecision in the equilibrium price. At equilibrium, unprecedented production levels are attainable, at the same time as a balance is being met between buyer’s benefits and cost of production, as such, externalities tamper with this balance. Let us look at an example of a positive externality where the customer does not obtain most of their buys which correspond to fall in production. For example, when one pursues pays for the education he will pay for costs as he/she gains knowledge. The positive externalities in this case such as improved society and decrease in crime rates are not accounted for as the consumer satisfies his wants (education). Alternatively, negative externality puts producers in a situation that they cannot bear all the costs. For example, chemical manufacturing industry contributes to pollution; this cost of pollution is not accounted for by the manufacturer. Therefore, there will be a market failure as the will be excess production and higher prices that do not match the quality of the product. Here the government will formulate policies to institute pollution costs either by levying or imposing penalties, as such business will be responsible the social cost or financial cost when they keep polluting the environment.
Efficiency and the Equity of a Tax System
Estimations of efficiency and equity are some of the most striking tradeoffs of public orders. Efficiency can be defined as the benefits that a society enjoys while equity refers to the how these remuneration are distributed in the society. The government methodologies always create discord in the opposing estimations of equity and efficiency. Dynamically, individuals with higher income have to pay higher taxes to fund government operations. Such analogy might accomplish a more prominent financial value but at the outlay of undermined proficiency. Higher taxes might impact on less productivity which might lead to less financial benefits. Therefore, Bassetto (2005) refutes this approach leads to building on the efficiency of the tax system and decreasing equity, hence, it detriments the poor populace.
Mankiw (2005) reveals that man is frequently
coming up with new ideas in the market and he never shrinks back to the former
perspectives. Therefore it is evident the as the economy experiences tremendous development, it is easier for
individuals to adjust to the market trends as well as the economic turbulences. It is now easy to become
a seller or a buyer in the market since there are many opportunities to
participate in the contemporary economy.
Almås, I., Cappelen, A. W., Lind, J. T., Sørensen, E. Ø., & Tungodden, B. (2011). Measuring unfair (in) equality. Journal of Public Economics, 95(7), 488-499.
Ayadi-Frikha, M. (2015). Internal Determinants of the Internationalization Behavior Dynamics of Young Firms. Journal of Behavioural Economics, Finance, Entrepreneurship, Accounting and Transport, 3(1), 32-38.
Bassetto, M. (2005, September). Equilibrium and government commitment. Journal of Economic Theory, 124(1). doi:10.1016/j.jet.2004.06.001
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. New York: Cengage Learning.
Mankiw, N. G. (2014). Principles of macroeconomics. New York: Cengage Learning.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. New York: WW Norton & Company.