Explain Why Equilibrium of Supply and Demand is Desirable
Demand and supply are very important aspects of economics as well as the market economy. Demand is the quantity of the product or service needed by the buyers in the market. Quantity demanded is the amount of the product or service that the customers are willing and ready to buy at a certain price in the market. Supply is the amount of product or service offered to the customers in the market ( Gustafson, 2017 ). Quantity supplied is the number of certain products that the suppliers are willing and ready to supply in the market at a certain price. Equilibrium is the point at which the quantity demanded is the same as the quantity supplied in the market. At this point, the supply curve and the demand curve intersect, and the economy is said to be equilibrium. At the equilibrium point, all the stakeholders; countries, individuals, and companies in the market are satisfied with the economic condition.
Explain the following concepts using the concept of consumer and producer surplus:
The Efficiency of Markets: consumer surplus is the difference between product market price and the highest price that the buyer is willing to pay. Producer surplus in the difference between the lowest prices that the supplier is willing to accept in the market and the market price of the product set in the market. The efficiency of markets is where the prices of products are set as per the consideration of all the available and relevant information in the market. The prices are determined after incorporating other factors besdes the producer and consumer surplus ( Bradley, Postel-Vinay, & Turon, 2017 ). The prices are not determined as per the highest prices the customer is willing to pay or the lowest price the consumer is willing to accept. In some instances, the customer prices and the supplier prices are decided based on the market prices. The intersection of demand and supply curves offers the quantity of the product and the market price. There is a space before the curves intersect where the prices the supplier is willing to accept is lower than the price the customers are willing to pay ( Burgess et al., 2017 ). The market price determines will have a surplus for both sides as the customers will pay market prices instead of higher prices and the suppliers accept market prices instead of lower prices. Both the customer and the supplier will have an extra value after the transaction, which is the surplus.
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Costs of Taxation: in some instances, losses are experienced in the market due the prices determine for the supplier and the consumer leading to a surplus. Such a loss is experienced due taxation of the products offered in the market. When the products are taxed, the demand and supply curves shift leading to losses in the market ( Burgess et al., 2017 ). For example, the consumer will pay the highest price than the market price due to taxes imposed on the products, as they are transferred directly to the consumer. In such a case, the customer will have paid higher prices, and there will be no surplus. Suppliers might be forced to accept the lowest prices than the market prices after the taxes are imposed on the products supplied. The supplier will not have a surplus, and he/she might have incurred a loss.
Benefits of International Trade : international trade increases the economic wealth of the country, which helps in boosting the economic wealth sourced from the division of labor. International trade efficient producers in different countries globally to compete and the prices of products will be reduced. The reduced prices will benefit all the countries participating in the trade equally without discrimination ( Bradley, Postel-Vinay, & Turon, 2017 ). The taxes imposed on the products involved in the international trade attract deadweight loss, which results from the assessment of tariffs. Deadweight loss reduces the total surplus that would have been enjoyed by the domestic economy, as the consumer surplus is reduced through the paying lower prices on the products. Consumers will increase the producer surplus through buying the domestic products or reduces the producer surplus through buying the imported products.
Discuss How Externalities May Prevent Market Equilibrium and the Various Government's Policies Used to Remedy the Inefficiencies in Markets Caused by Externalities.
Externalities are the situations where the transactions conducted between the seller and the buyer directly affects other people outside the transaction. When a transaction between the buyer and the seller results in a negative externality, the optimal quantity of the product in the market is deemed t be less than the equilibrium quantity. If the resulting externality from the transaction is positive, the optimal quantity of the product in the market is considered greater than the equilibrium quantity ( Burgess et al., 2017 ). The governments with the aim of rectifying the inefficiencies caused by the externalities have designed various policies. Government regulation is one of the policies that aim at rectifying the externalities. It is a situation where the government designs some regulations, which will advocate for the ban on the products that lead to externalities. Such products will be eliminated in the market such that externalities can be avoided. Introducing subsidies is another form of remedy that helps in addressing the problem of externalities. Considering education as one of the goods that have huge external benefits to the society, if allowed to be traded as free market will reduce the output ( Gustafson, 2017 ). The only option is paying subsidies such that its prices will reduce and all people can access. Taxing the polluters is another remedy for the externalities. When a tax is imposed on the product that causes externalities, its cost f production will rise, and the price will increase. The rate of consumption will reduce leading to a reduction in the externalities caused by the product.
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.
The main purpose of the taxes imposed on various products is to generate revenue for the government, which can be spent in other projects and activities. The goals of any tax imposed are efficiency and equity. The exchanges experienced between the equity and efficiency of the tax system has posed a major challenge in economics. A tax system is considered efficient when the cost incurred is lower than the revenue earned ( Burgess et al., 2017 ). Equity of a tax system is ensuring that the burden of a tax is evenly distributed among the people without discrimination. People should pay taxes as per the benefits or services they receive from the government. According to the benefits principle, the people that earn and own more properties will pay more taxes.
References
Bradley, J., Postel-Vinay, F., & Turon, H. (2017). Public sector wage policy and labor market equilibrium: a structural model. Journal of the European Economic Association , jvw026.
Burgess, S., Propper, C., Ratto, M., & Tominey, E. (2017). Incentives in the public sector: Evidence from a government agency. The Economic Journal , 127 (605).
Gustafson, M. T. (2017). The market sensitivity of retirement and defined contribution pensions: Evidence from the public sector. Journal of Public Economics , 145 , 1-13.
