• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

The efficient market (socially desirable) equilibrium levels of price and output. What action might the government take in each case to ensure that the efficient level of output is restored?a) An industry emits carbon gas into the atmosphere.

Extracts from this document...


Question 1 Using figure 10.1, p.199 of your prescribed text as a starting point, explain the impact of the following events on the efficient market (socially desirable) equilibrium levels of price and output. What action might the government take in each case to ensure that the efficient level of output is restored? a) An industry emits carbon gas into the atmosphere. As shown in the figure, at the normal market price (Pp) when the supply and demand for the product is balanced or at equilibrium (Ep), the quantity produced or consumed is at the level of Qmarket. Thus, Qmarket quantity maximises the total value to buyers minus the total private costs to the industry. But when the industry emits carbon gas in to the atmosphere, it causes air pollution for the people who breathe the air, thus producing a negative externality. An externality is the impact of one person's actions on the wellbeing of a bystander and an adverse impact causes a negative externality (Gans, King, Mankiw, 2003, p. 198). Because of this externality, the cost to society for producing the good is larger than the cost to the industrial producers. For each quantity produced, At any given quantity, this social cost curve (Ss) is above the supply curve Sp, the difference between the two curves showing the cost of the externality. ...read more.


The government can correct the market failure by internalising this externality by means of a tax on tobacco. As seen in Figure 3, when the government imposes a tax, it will increase the price of tobacco to consumers and this will lessen the demand quantity(to Q), bringing the demand quantity closer to socially desirable QOptimum level. If the tax is optimal it will equal the externality cost, shifting the demand curve down, thus allocating resources to balance efficiently at Es. Workers Output MP AP FC ($) VC ($) TC ($) MC ($) AVC($) AFC ($) ATC ($) 0 0 0 - 200 50 x 0= 0 200+0= 200 - - - - 1 5 (5-0)/(1-0)= 5 5/1= 5 200 50 x 1= 50 200+50= 250 (250-200)/(5-0)= 10 50/5= 10 200/5= 40 250/5= 50 2 15 (15-5)/(2-1)= 10 15/2= 7.5 200 50 x 2= 100 200+100= 300 (300-250)/(15-5)= 5 100/15= 6.67 200/15= 13.33 300/15= 20 3 28 (28-15)/(3-2)= 13 28/3= 9.33 200 50 x 3= 150 200+150= 350 (350-300)/(28-15)= 3.85 150/28= 5.36 200/28= 7.14 350/28= 12.5 4 40 (40-28)/(4-3)= 12 40/4= 10 200 50 x 4= 200 200+200= 400 (400-350)/(40-28)= 4.17 200/40= 5 200/40= 5 400/40= 10 5 48 (48-40)/(5-4)= 8 48/5= 9.6 200 50 x 5= 250 200+250= 450 (450-400)/(48-40)= 6.25 250/48= 5.21 200/48= 4.17 450/48= 9.38 6 55 (55-48)/(6-5)= 7 55/6= 9.17 200 50 x 6= 300 200+300= 500 (500-450)/(55-48)= 7.14 300/55= 5.45 200/55= 3.64 ...read more.


Thus the firm is shifting towards achieving economies of scale, which is reached when the third worker is employed. After this point, as the firm starts to experience decreasing marginal product, and marginal costs rise increasing inefficiency, hence diseconomies of scale set in. The Average Variable Cost(AVC) curve changes as the firm alters the quantity of output produced. When Marginal cost is less than AVC, the AVC decreases while when Marginal Cost is higher than AVC, the AVC increases. This increasing and diminishing marginal cost makes the AVC curve U-shaped. The average fixed costs are average of costs that don't vary with the quantity of output produced. The firms'AFC curve has a steady decline as output rises, because the fixed cost is getting spread over a larger number of units. The Average Total Cost curve represents the cost of a typical unit; the total of AVC and AFC. From the graph, when output is increasing, a steady decline of ATC is visible with a small increase nearer to the end resulting in a slight U-shape curve. This is because ATC curve is influenced by shapes of both AFC and AVC curves. Initially at low levels of output the ATC is high because fixed costs are spread only over a small number of outputs. Then ATC declines as output increases until output is 55 units per day, when ATC is $9.09 per unit of furniture. When the firm produces more than 55 units, ATC starts rising again, because of the rise in AVC. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Do We Need Government Intervention To Ensure An Efficient Allocation of Resources?

    A simple conclusion of the government intervention leads us to see that it should not occur and where it has, it should be removed. Where there are no controls over price, wages, subsidies or regulations, only then true efficient allocation of resources could be achieved.

  2. Bellway Plc is a holding company with subsidiaries; its main subsidiary company is Bellway ...

    103.9 96.7 66.4 53.2 40.7 35.9 31.9 Wessex 480 474 475 372 380 179.6 181.9 133.5 110.6 119.7 86.2 86.2 63.4 41.9 45.5 Southern Sub-Total 3243 2791 2511 2500 2543 172.9 171.6 149.3 157.1 139.6 560.7 479.0 374.9 392.7 354.9 Group Total 6610 6278 6044 5725 5714 161.4 149.7 120.8 119.0 106.4 1066.5 939.8 730.3 681.3 607.8 7.

  1. The structure of the airline industry.

    Regional airlines generate under $100 million in revenue. This class is further subdivided to the subcategories: Large, Medium, and Small. These airlines operate almost exclusively in a certain region. These airlines serve majors in partnerships to get travelers to remote areas of the country. Finally, cargo airlines do as the name suggests.

  2. Chinese car market overview. Citroen case study

    For these benefits to be realised fully, it is essential that China implements its terms of accession in a timely and comprehensive manner; the monitoring of China's WTO compliance will be a major EU priority in the years to come.

  1. Retailing In India - A Government Policy Perspective

    On top of this, a tax (octroi) is levied on the movement of goods from one district to another. This practice negatively impacts retail chains, as a higher proportion of their merchandise is sourced from outside the state of operation.

  2. Split Votes: A Nation Divided on the Marijuana/Drug Legalization Debate

    Because of this, think tanks may feel that their time is better spent on topics that can have a productive end. Two think tanks, however, have touched on the subject: the Hudson Institute and the Cato Institute. Though their arguments do not cover the wide array of possible subtopics or

  1. "ASI" LTD case study.

    represenative of Henkel Ceresit for Bulgaria and many others. /Construction & City weekly, 1998-2001/ The second and very young product of the company is the luxury magazine "Business Style" which the company started to issue in March 2001, the magazine is published once in two months and is not for sale, it goes as a direct mail to all the subscribers of "Construction & City" newspaper.

  2. Macroeconomic Equilibrium.

    External economic shocks might also cause the aggregate supply curve to shift inwards. For example a sharp rise in global commodity prices. If AS shifts to the left, assuming no change in the aggregate demand curve, we expect to see a higher price level (this is known as cost-push inflation)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work