Question

1. how does the concept of consumer surplus and producer surplus relate to market failure from an economic perspectice? How do demand-side failures and supply-side failures result in equilibrium points that are not optimal for society?

2. During week 2, the quantity demanded of hot dog buns at a price of $1.20 increased from 100 units in week 1 to 120 units during the week 2 when hot dogs sold at $1.89 rather than $2.29. The next time hot dogs went on sale, the price of buns increased to $1.40 and 110 buns were sold. Was this a good business decision? why or why not?

3. does positive externalities or negative externalities result in equilibrium quantity higher than optimal social quantity of a good?

Answer 1

1

            Consumer surplus refers to the difference between the price that a consumer pays and the price that a consumer is willing to pay. A producer surplus on the other hand refers to the difference between how much a producer would be willing to accept and the actual price that the producer would get while selling the commodity in the market. A consumer surplus thus defines the utility or gain that the consumers would receive when they buy the products and services in the market and the producer surplus represents the same from the point of view of the producer. The following are the various means by which the consumer and producer surplus would affect the market equilibrium of an economy.

· An excess of consumer surplus means that the consumer Is paying lesser price for that particular commodity which means that the particular producer is not getting the expected returns from that commodity

· Once the expected returns from a commodity is not obtained, it would result in lower revenue returns for the firm and thus would either result in lower production of that particular commodity or thus would affect the complete production pattern of that firm

· Once the production is affected, the consumer would be left with lower ranges of such products in the market and hence would affect the consumption patterns within an economy

· An excess of producer surplus would mean that the consumer would now have to pay increased prices for the same commodity which would affect the consumption patterns of the consumer in the economy.

· Once the consumption behaviour of consumers in an economy is reduced, it would result in lesser products of similar types being sold in the market

· Once the sale of products are lowered, the production patterns of the firm would again be affected

                                             A demand side failure refers to such a situation wherein the consumers could not be charged the right price and the supply side failures refers to a situation where there are failures caused in the production patterns and hence would lead to disadvantages for the market. The increasing taxation forms the major reason for the supply side failures and hence the supply of products in such a market would be lower affecting the consumption behaviour in the market. In demand side market failures, the consumers are not charged for a utility that they obtain in a market and hence leads to the idea of free consumption in an economy similar to the consumption that occurs for a social good. The impact of these free consumption pattern is that the consumer would be getting more benefit than that of the producer and hence would lead to a destruction in the market equilibrium. In such situations the market becomes unable to distribute the resources effectively in the economy under consideration. The impact of these effects would result in free rider issues within an economy and hence the equilibrium point in such an economy would be such that both the consumers and the producers would be having negative effects and the optimal point would be not satisfactory for the society.