Introduction
The operation of the market has an important implication on consumers and their welfare. It is important to understand how various aspects of economics work and how they affect the people in an economy. Therefore, looking at some of the markets and economics of public sector concepts helps to better understand their implications on the lives and welfare of the consumers.
Equilibrium in the market refers to a situation where the level of demand is the same as the demand. In this case, there is no excess and the market clears. It is the naturally desired state for the market since it reflects optimality. There are many reasons why equilibrium in the market is desirable. For starters, the fact that the goods supplied equal what is demanded means that the allocation is efficient (McEachern, 2012). In this case, the every person in the economy including individual consumers, firms, and even the economy as a whole will be satisfied with the prevailing economic conditions.
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Apart from the lack of excess demand or production, equilibrium also implies that the price level in the economy is just right and optimal (Veseth, 2014). At that point, the price is acceptable for both the buyers and the sellers. On the production side, sellers find the price right to sell all that they bring to the market. On the other hand, buyers like the price too and buy everything that is available in the market. Therefore, the equilibrium price point is the one time when both sides of the market are happy and content (Veseth, 2014). Having an economy that is operating at equilibrium results in the proper price level and thereby benefit all who are involved.
Perhaps the most important aspect of having market equilibrium is the fact that it is associated with efficiency. For a consumer, allocative efficiency implies that consumers are receiving the maximum possible satisfaction that they can get from the combination of goods and services present in the market. At such a point it would imply that one could not possibly increase their level of satisfaction from changing their consumption patterns and buying different quantities (McEachern, 2012). Extending the concept to the market leads one to realize that society will receive maximum benefit at equilibrium. It is the point at which both consumer and producer surpluses are maximized.
A further exploration of the issue would reveal that allocative efficiency implies two related aspects. The first is consumption efficiency. It implies a point where consumers make an allocation of their income in such a way that they can get maximum satisfaction in spite of having limited incomes (McEachern, 2012). Ultimately, that assumes that the goal of each consumer is to maximize utility and that they are rational. The second condition is efficient specialization and exchange. In this case, firms in the market are required to specialize in the production and sale of goods to consumers. On the other hand, the consumers’ role is to work so that they can earn incomes to buy goods. Therefore, the incidence of these two conditions makes for maximum efficiency. The point of equilibrium between demand and supply implies the highest level of allocative efficiency as marginal benefit equals marginal cost (Seth, 2015). Moving away from there would lead to welfare losses.
Efficiency of Markets
Consumer welfare is realized when people pay less than they would be willing to pay for a good. Therefore, it is calculated as the difference between the market price or the amount that one pays for goods and the highest price that they would be willing to pay for the same basket of goods. On the other hand, producer surplus is expressed as the difference between the lowest price that the producer would be willing to accept when selling goods and the actual price (McEachern, 2012). An efficient market is an ideal situation where both producers and consumers are able to maximize their surplus. It occurs at the point where the price equals marginal cost.
Costs of Taxation
In economic analysis, taxes are seen as a cost. It is not just limited to the actual amount paid to the authorities but also includes welfare losses. Taxes increase the prices of goods and reduce the amount that one can buy with their income (Seth, 2015). With the reduction in demand, consumers see an increase in their surplus and are left worse off as a result. On the other hand, taxes also affect producers. With the implementation of a tax on goods, producers will see the amounts that they can supply reduce. Consequently, they will see a decrease in their surplus (Seth, 2015). Overall, taxes interfere with the market equilibrium which has a negative effect on welfare.
Benefits of International Trade
The basis of international trade is that economies focus on producing the goods that are efficient at producing and trade to get what they cannot produce efficiently. Without international trade, economies would be forced to produce goods in an inefficient manner. Consumers benefit by getting cheaper goods and thereby increasing their surplus. Producers benefit too from international trade as they are compelled to only produce what they can supply efficiently. Therefore, their surplus will be much higher as a consequence.
Externalities
Externalities prevent market equilibrium since they make it impossible for the market to properly price goods. The government may step in to remedy the situation by especially when production results in negative externalities by imposing taxes. The tax would ensure that the business incurs the full cost of its production. In this case, the business is made to factor the costs of its activities which is not possible when the decision making is entirely left to the market. By stepping in to resolve negative externalities, the government ensures that the citizens do not experience welfare loss as a result of business activities.
Tax Efficiency and Equity
Tax efficiency implies that the collection of taxes should be done at the least costs possible. In this case the state should seek to eliminate administrative costs associated with raising its revenue while also ensuring that its tax policy does not distort economic decision making (Seth, 2015). On the other hand, tax equity implies fairness of the taxation system. According to the benefits principle, the taxes one pays should be commensurate with the benefits they receive from the government. For example, the money collected in the form of gas tax should be used to build better roads which would make motoring much easier and cheaper. At the same time, the benefits principle also prescribes that taxes on people’s incomes should be levied based on one’s ability to pay (Seth, 2015). Therefore, no single person is overburdened or treated unfairly with regard to taxes.
Conclusion
An understanding of the various market and economics of public sector concepts is important. As seen above, it is desirable to have an efficient economy. Consumers and producers desire to have an economy in which they are able to maximize their welfare. They also desire to have a taxation system that is both efficient and equitable.
References
McEachern, W. (2012). Economic principles Australia: South-Western Cengage Learning.
Seth, S. (2015). Economics New York: Rosen Publishing Group, Inc.
Veseth, M. (2014). Introductory Macroeconomics Burlington: Elsevier Science.
