Markets and the Economics of the Public Sector

Subject: Economics
Type: Analytical Essay
Pages: 5
Word count: 1178
Topics: Capitalism, Consumerism, Finance, International Business, Tax

Equilibrium of Supply and Demand

The equilibrium of demand and supply is achieved when both demand and supply functions intersect at a point to achieve a common buying and selling prices as shown in the figure below. The supply and demand equilibrium is very desirable as the economy is at its most stable position. The desirability of this point is the fact that economy does not suffer the effects of excess supply or excess demand. At the equilibrium point the quantity of goods supplied equals the amount of goods demanded in the entire market and the arrived at price is desirable for both the suppliers and buyers. In this case, everyone who participates in the given market is gratified by the existing economic status as the prices do not strain anyone. When this point is arrived at the  total goods produced are sold and bought at the existing price, which satisfies both supply and demand.

As indicated in the figure above, supply and demand curves intersect alienating any allocative inefficiency. The supply and demand equilibrium point allows for the achievement of equilibrium quantity and price, which are desirable to both the buyers and producers. This point allows for the market to delineate any shortages or surpluses that are unhealthy for any economy whether developed or emerging. The equilibrium point of demand and supply limits the possibility of price fluctuations. In supply and demand disequilibrium, when the quantity of goods supplied supervenes upon the demand, consumers have a lot of them at their exposure pushing the price down at the undesirability of the supplier. In lieu, when the quantity demanded supersedes the goods supplied, consumers have few good at their disposure and compete against themselves pushing the prices. In both cases, the “invisible hand” intervenes to either push the prices and production up or down until the equilibrium point is achieved to the desirability of the consumer and the supplier. However, it should be noted that the equilibrium point of supply can only happen theoretically, which allows the prices of good to constantly change with the fluctuations of demand and supply of the products in the market. 

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Consumer and Producer Surplus’ Concepts

Efficiency of Markets 

In terms of consumer and producer surplus, the efficiency of markets when the populations have rational expectations with the populace updating their expectations befittingly when new information regarding the market becomes available. The efficiency of the market requires that the investors have random reactions to the changes in the market while following a distinct Gaussian distribution pattern to alienate the possibility of some people making abnormal profits. In an efficient market, the prices are unpredictable and random to prevent any planned approach to investment as a way of ensuring that no producer or consumer is strained (Heakal, 2013). The efficiency of the market cushions the producers and consumers from abrupt and unexpected shortages or surpluses. 

Costs of Taxation

Whether the government expenditure benefits supersede the costs of taxation or not, the costs of taxation still impact the mutual benefit enjoyed between the producers and the suppliers (Chetty, 2009). The consumer and suppliers’ surplus is the one of the economic aspect that is greatly influenced by the costs of taxation. When the producer has a surplus against the demand, he or she might be taxed for goods not sold, which makes taxation quite costly. It should be noted that suppliers’ goods are taxed once they arrive at the market and if they are not sold but taxed, the supplier might opt to make deadweight losses. When the supplier has a surplus demand, he or she might resort to not purchasing any products if the taxation is raised as a result of shortages. 

Benefits of International Trade

During both the consumer and the supplier surpluses, the international trade becomes very vital for economic desirability. When consumer surplus occurs in a given market, the international trade becomes beneficial as goods could be outsourced beyond the border to satisfy demand and push for the desired market equilibrium. Concisely, international trade reduces the dependence on a single market during consumer surplus, which creates market equilibrium. During, supplier surplus, the international trade provides a market for the surplus goods creating equilibrium in the local market. This increases sales and profits as goods are sold at the desired prices far off from a disequilibrium price arrived at due excess production. 

Externalities and Market Equilibrium

Externalities, especially negative are common factors that distort market equilibrium as the total cost of production and a product are not accounted for during its distribution to the market. For instance, a company producing widgets and polluting the environment and not compensating for the pollution is a negative externality since the producer would be selling at unethical prices. In this case, the consumers will shy away from buying the widgets creating a theoretical excess surplus. A positive externality is a benefit that is infeasible to charge to provide. In the case of positive externalities products are not provided as often as possible which creates an excess demand for the product, causing market disequilibrium. 

The government can use various policies to ensure that it delineates the effects of the externalities on market equilibrium, which entail reducing negative and promoting positive externalities. One such method is through the introduction of the corrective tax to limit the negative externality associated with unethical production that is not accounted for. Further, the government could offer subsidies to the production and the price of a product eliminating the negative externality of the good being produced roguery. Subsidies allow producers to manufacture goods in the outright manner without harming the society and the good being affordable to customers, which leads to arrival at an equilibrium price. Finally, positive externalities could be achieved through command-and-control policies that prevent the participation in negative externalities that create disequilibrium (Spaulding, 2017). 

Tax Efficiency and Equity

Through the reduction of the administrative burden, tax efficiency allows for reduced costs of abiding by the tax code verbatim while also reducing any economic distortions that result from tax (Chetty, 2009). The reduction of administrative burden through efficiency benefits the taxpayers as well as the economy considering that the issue of tax collection is a requirement but not a tax policy objective. Tax equity principally requires taxes should be fairly paid. While fairness can be determined using multivariate criteria, tax equity requires that taxes should be paid equally and in a fair distributable manner. The benefits principle dictates that taxes should be paid based on the gains accruing from the government services. On this regard, tax efficiency becomes very vital as to some extent it offsets the costs that are imposed on the taxpayers. Tax equity becomes vital for taxes that are imposed on investments and income as they are dependent on the ability to pay. 

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  1. Chetty, R. (2009). The Simple Economics of Salience and Taxation. NBERWorking Paper 15246, 1-30.
  2. Heakal, R. (2013). What Is Market Efficiency?
  3. Spaulding, W. (2017).
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