Question

In this assignment, you are asked to explore the nature of governmental action in the market place. These actions can take the form of governmental price or quantity interventions, a tax policy, a law, or the provision of a governmentally provided good. With the tools provided to you in chapters 5-6 consider the impact of the government action on surplus and deadweight loss. What would happen if they did not intervene or provide the good in question? Are there any externalities at play in the market you choose to examine? Similar to the previous assignment start your analysis with a small clip from a policy document or a fact/statement. These clips need not cover the whole story. State the source and provide a link to the document in question as a reference. Your assignment should be approximately 300-400 words (not including the quotations).

Being concise is a value in economics and you should strive to be direct and clear. Meandering writing will be penalized rather than rewarded. You may include tables/diagrams/figures if you wish. Together with the text, these additions should not take up more than two standard pages. Materials that appear beyond a second page will be disregarded. These supplements should be used to support your argument rather than to fill space.

Answer 1

If we see this picture it tells us how surplus is affected and how deadweight loss is created due to taxation.

Before taxation, total surplus was A+B+C+D+E+F

After taxation surplus is reduced to A+F+B+D

And the deadweight loss is C+E which is caused due to rise in the prices to Pb because of which buyers leave the market and sellers also have to sell it at low price Ps hence they also have to leave the market.

before subsidy total surplus = a+b+d+g

and after subsidy total surplus = a+d+b+g-f

Hence deight weight loss is indicated by f and e is the equilibrium point.

government sometimes charges taxes in order to make the output socially optimum. Consider a case where the society is faced with pollution and hence they want the firm to produce lesser output. If the market is left alone then then it will not produce socially desirable output and in that case the government has to come in between and charge an amount by the amount of tax equivalent to that of the negative externality that they are producing due to which supply curve will shift back to the left and the society will produce less output than before. If the government didn't intervened here the good would have been over produced.

Similarly if the government observes that socially optimum output in some areas is more than what is actually produced i.e goods are under produced in an economy then the government gives subsidy to the people so that they can avail the good at a lower price thereby increasing the amount of quantity available.

Yes there are indeed externalities in the market we discussed. Although these externality problems can be solved by coase theorem where private parties solve the problem and lead to an efficient outcome but in case private parties cannot come into a conclusion, then government has to intervene.