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Laser Printer and Government Intervention - Case Study Example

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The reporter casts light upon the fact that before the intervention of the government, the market results into an equilibrium quantity and price established at the meeting point of the marginal private cost (MPC), or the supply curve and the demand curve represented by P1 and Q1…
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Laser Printer and Government Intervention
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Laser Printer/Government Intervention Case Study
Figure 1 below shows a standard demand and supply of the dumped laser cartridge in Kuwait; before and after internalizing the externalities. Before intervention of the government, the market results into an equilibrium quantity and price established at the meeting point of the marginal private cost (MPC), or the supply curve and the demand curve represented by P1 and Q1. Producers and consumers benefit from the gains as a result of this equilibrium. The consumer surplus is represented by the variation between the price and the willingness to pay (which is the elevation of the demand curve). In other words, this is represented by the area a+b+c+d. On the other hand, the producer’s surplus is represented by the variation between the marginal cost of production and the revenue earned (P1). This is the area f+g+h. The producer surplus corresponds to the profits minus the fixed cost. However, production of Q results into externality effects such as lack of market for the home produced cartridges. This is represented by the Marginal External Cost (MEC). Considering that such costs do not change, then it means that the entire cost to the society regarding production of Q is the marginal society curve, as represented by MSC = MPC + MEC. Q1, which is an external cost, corresponds to the area: c + d + e + f + g + h. The intervention of the Kuwait government through imposition of tax on the imported cartridges is aimed at internalizing the externality, which is arrived at after taking consideration the external cost of production (Barthold 133).
If the government imposes a constant importation tax on every unit of cartridge imported so that this raises the cost of production, which corresponds to the MSC curve, then it means that the new market will be represented by P2 and Q2. Lower quantity and a higher price will occur as a result of the government regulation. Area (a) is the consumer surplus at the new equilibrium and (h) is the producer surplus. Area b + c + f represent the government tax collection. The tax’s dead weight loss (DWL) is represented by d+g. Nonetheless, b + c + f, is the external cost, which is avoided. This means that the net benefit from the government intervention is d + e + g - d - g = e > 0, which is: MEC-DWL. To find out whether the imposed tax is really efficient, then a benefit-cost analysis should be conducted. Assuming that the producers are supposed to pay extra tax, their surplus will be represented by the area (b), in which case area c + f + h is the elevated production costs resulting from the government intervention. As the output decreases from Q1 to Q2, some jobs are lost, though more jobs are gained when the home industries employ more people (Barthold 135).
MSC=MPC+MEC
P
a e MPC
P2 b c d
P1 f g
h
D
Q2 Q1 Q
Figure 1: Negative externality curve
Work Cited
Barthold, Thomas."Issues in the Design of Excise Tax." Journal of Economic Perspectives (1994):133-151. Print. Read More
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