There are markets that are legal and can potentially achieve efficiency by providing a maximum total...

There are markets that are legal and can potentially achieve efficiency by providing a maximum total surplus to the society. But even in those markets, the government usually intervenes by taxing or other forms of regulations. Pick only one such market and explain the effect of the existing government interventions on the efficiency of the market.

Expert Solution

There are government regulations in rental accommodations in several cities where a rent ceiling is often imposed in the name of making such rental housing affordable. Below is one such example where market price P1 ensures that market clears and total surplus is maximized. However with rent control in place at P2 there is a shortage of rental housing units and a resultant decline in total surplus.

Another example is from a market for cigarettes where a sin tax is often imposed in order to generate revenues. The market however fails to maximize total surplus and there is a deadweight loss

Rahul Sunny answered 10 months ago

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