Effects on Economic Efficiency of Government Price Controls and Taxes Name of Institution Effects on Economic Efficiency of Government Price Controls and Taxes Consumer Surplus Consumer surplus gives a measure of the distinction between the uppermost price a consumer is able to offer and the price the consumer indeed offers…
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The marginal gain is the extra benefit to a consumer from the usage of one extra unit of the service and good. The overall quantity a consumer surplus in any market is equivalent to the region beneath the demand curve and over the market price. This region shows the gain to consumers in surplus of the price they exchanged for a commodity. In the diagram below consumer surplus is represented by region A where it is above market price of ? 5 and the units sold which amount 5,000. Source: (Sexton, 2010) Producer Surplus Producer surplus refers to the distinction amid the least price a company would have been eager to allow and the price the company actually obtains. The overall quantity of the producer surplus in a market is equivalent to the region above the market surplus curve and beneath the price in the market. The supply curve illustrates the eagerness of companies to supply a commodity at various prices. Firms will be willing to supply an extra unit of a commodity only where they obtain a price equivalent to the extra price of production of that unit. Marginal cost is the extra cost to a company of making one extra unit of a product or service. Normally, the marginal cost of making a product rises as additional products are made in a given time period. The diagram below shows the relationship between the consumer surplus and the producer surplus. The producer surplus on a demand curve is found below the consumer surplus and above the supply curve. Source: (Sexton, 2010) A competitive market is one which has numerous buyers and sellers. One of the advantages of a market system is that it leads into effectual results. In a competitive equilibrium the marginal benefit is equivalent to the marginal cost where equilibrium leads to an economical effectual level of outcome in a competitive market. On the other hand, deadweight loss refers to a situation where the cost of a product is above the average or equilibrium price, economic surplus is below what it could be at the equilibrium price. The decrease in the economic surplus emanating from the market which is not in a competitive equilibrium is what is known as the deadweight loss. The diagram below shows the deadweight loss on a demand and supply curve. Source: (Sexton, 2010) Economic Surplus and Economic Efficiency As mentioned earlier consumer surplus gives the dimension of the benefits to customers from purchasing a specific type of good while the producer surplus provides the dimension of the benefits to firms from merchandising a specific commodity. Thus economic surplus is now the total of the benefits to the company plus the benefits to individual consumers. This is normally the most efficient measure of the advantage to the community from the manufacture of a product or service. Equilibrium in the aggressive market leads into the highest quantity of economic surplus or the entire gain to the community from the manufacture of product or service. In the diagram below the blue and the brown region represents the economic surplus. Source: (Sexton, 2010) Economic efficiency on the other hand refers to the market results where the marginal gain to consumers of the final produced unit is equivalent to its marginal production cost and where the total of consumer surplus and that of producer surplus is at its highest best (Sexton, 2010). It must be noted that not every person is better off in case a market is
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