• 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. The structure of the airline industry.

    Airlines have earned a net profit of 1%-2% compared to the 5% average of the US Industry. Airlines derive most of their revenues from the fares they charge passengers. They also earn ancillary revenues from transporting mail, shipping freight, selling in -flight services, and from serving alcoholic beverages.

  1. The Quest for Optimal Asset Allocation Strategies in Integrating Europe.

    In order to do so, he quantified the difference between the risk of portfolio assets taken individually and the overall risk of the portfolio. He showed that the variance (and thus the risk) of a portfolio is determined by the variances of the underlying assets, the covariances or the correlations

  2. Is the Welfare State Desirable?

    be persuaded into killing Duncan, if he was willing for chance to follow out whatever it brought to him, it would become very easy for anybody, in particular, Lady Macbeth, to set up his future. Additionally, it is also shown how his good nature and his good values could easily

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

    Opposing the government on this issue could be costly to the institute. This is not to say that the desire for government fund is the only reason the Hudson Institute in anti legalization. The say that most of their money comes from private donations.

  2. Chinese car market overview. Citroen case study

    As a recent entrant to the World Trade Organization (WTO), China is making trade policy transitions in a few years that other countries took over 40 years to accomplish. China is also trying to overcome decades of government secrecy in dealing with international trade issues.

  1. Briefly explain why initial levels of GDP might influence subsequent economic growth.

    This has reflected both more investment and faster technological change in societies which were devoting far more resources t education and research and development than they had in the 1990s and twentieth centuries. The decline in TEP growth in 1973 to 1999 in all three countries in the table is

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

    50% Buildings held as fixed assets 40 years, 2.5% - * Goodwill Wilson has incorporated goodwill into there accounts which has resulted in an increase to there assets, while Bellway does not us any form of goodwill. * Different financial and business risk profile Companies have different capital structures so are exposed to different risk.

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