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Cost Benefit Analysis - Math Problem Example

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Instructor Econ 361 DE – Problem Set Two Questions 1. Question a. Use a diagram to illustrate the deadweight loss that, in the absence of government intervention results from information asymmetry. Solution: A deadweight loss refers to specific forms of benefits that consumers or producers lose due to inefficiency within market operations…
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Cost Benefit Analysis
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Cost Benefit Analysis

Download file to see previous pages... Asymmetric information can lead to disappearance of markets or rather inefficient allocation of resources, which causes the deadweight loss (Brent 98). A deadweight loss can be illustrated on the basis of the following graph. In the absence of government interventions from asymmetrical information, the market is likely to be inefficient thus causing a consumer surplus gain represented by CFEG and a consumer surplus loss represented by DGB. The graph CFEG+GEB represents the producer surplus. Therefore, the deadweight loss in this respect will be represented by DGB+GEB. Therefore, in the absence of the government interventions in a market with asymmetrical information, there is likelihood that the market will experience a deadweight loss represented by the graph DGB+GEB. b. Briefly describe a policy that could partially or entirely eliminate the deadweight loss resulting from information asymmetry. Solution: Deadweight loss results from the inefficiencies within various markets especially with respect to asymmetrical information. Efficient markets need symmetrical information to both buyers and producers. In the event that one party has more information than the other then there is likely to be inefficiency within the market, which definitely leads to deadweight loss. Nonetheless, various government policies can be employed in order to eliminate the deadweight loss resulting from information asymmetry (Brent 79). One such government policy is provision of adequate information in various sectors through various interventions such as cost-subsidization policies. The cost-subsidization policy will assist in making sure that every individual buyer has adequate information and access to specific services. c. Use the diagram, indicate the benefits, costs, or transfers that would result from implementing your policy (show these areas on your graph) and describe discuss each. Solution: The government’s involvement in eliminating the deadweight loss is likely to yield to various benefits, costs, and possible transfers. Through cost-subsidization programmes, the government will enable the customers to achieve social benefits hence reducing costs in respect to acquisition of goods. The following diagrams illustrate how gained social surpluses will assist in eliminating deadweight loss caused by the information asymmetry. In the above figure, the involvement of the government through cost-subsidization has caused an increase in the social surpluses hence making it possible for the elimination of the deadweight loss within an inefficient market. Another graph illustrating the significance in terms of the costs, benefits, and transfers that consumers may derive from government inventions involving the cost-subsidization policy that aims at providing adequate information regarding the market is represented below. This graph provides an illustration of how consumers benefit from the government invention. The benefits are increase in government revenue on one hand and gain in the consumer surplus. However, the transfer experienced is the shift of surplus from consumers to producers hence bringing about loss or cost to producers as they lose their surpluses. d. Describe any benefits, costs, or transfers that do not show up in your diagram. Solution: Even though benefits, costs, and transfers are illustrated in the above graphs, there are some costs, benefits, ...Download file to see next pagesRead More
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