From Market Failure to Market Based Solution - Assignment Example

Part A a. Price elasticity when price increases from $2 to $2.5 = {(Q2-Q1)/ (Q2+Q1)/2} / {(P2-P1)/ (P2+P1)/2} = {(281000-310000) / (281000+310000)/2} / {(2.5 -2) / (2.5+2)/2} = -.545 The demand is price inelastic. Price elasticity when price increases from $2.5 to $3 = {(Q2-Q1)/ (Q2+Q1)/2} / {(P2-P1)/ (P2+P1)/2} = {(244000-281000)/ (244000+281000)/2} / (3-2.5)/ (3+2.5)/2} = -.641 The demand is price inelastic Price elasticity when price increases from $3 to $3.5 = {(Q2-Q1)/ (Q2+Q1)/2} / {(P2-P1)/ (P2+P1)/2} = {(209000-244000)/ (209000+244000)/2} / {(3.5-3)/ (3.5+3)/2} = -.594 The demand is price inelastic Price elasticity when price increases from $3.5 to $4 = {(Q2-Q1)/ (Q2+Q1)/2} / {(P2-P1)/ (P2+P1)/2} = {(180000-209000)/ (180000+209000)/2} / {(4-3.5) / (4+3.5)/2} = -.497 The demand is price inelastic Price elasticity when price increases from $4 to $4.5 = {(Q2-Q1)/ (Q2+Q1)/2} / {(P2-P1)/ (P2+P1)/2} = {(150000-180000)/ (150000+180000)/2} / {(4.5-4)/ (4.5+4)/2} = -.535 The demand is price inelastic Coefficient is “the change in price by 1% brings what percentage change in demand for goods”. (John, 1999) b. The graph look as The different elasticities have been shown at the dots marked in the sales graph. There is difference in elastcities along the stationary demand curve because as “the price increases the demand falls but the change is demand does not match to the proportionate increase in price”. (John, 1999). It results in different elasticities. c. The factors which affect the elasticity are Availability of substitutes: “Increase in the number of substitutes affect the price elasticity of demand”. (Todd, 2007) When a consumer has choice he can switch. This affects the sale. “Increase in the number of substitutes increases the elasticity making it more elastic”. (Todd, 2007) Amount of income spent on the good: “The amount a consumer keeps ot of his budget for a product affects the elasticity of demand”. (Todd, 2007) The elasticity gets affected by it. “Products that have a large share of the amount the consumer spends have higher elasticity”. (Todd, 2007) Time Period: Elasticity gets affected by it. “Elasticity is more when the time period is high as consumers have sufficient time to alter their behavior of purchase”. (Todd, 2007) Degree of Necessity: Newspaper has high degree of necessity. This increases when the product is a luxury item. “Necessity products tend to have low elasticity compared to luxury products”. (Todd, 2007) d. The total revenue and profit is provided below. Total revenue is calculated by units sold * price. Profits = revenue- cost to produce. Price Sales price elasticity Cost Revenue Profits $2 310000   $193,000 $620,000 $427,000 $2.50 281000 ($0.545) $184,300 $702,500 $518,200 $3 244000 ($0.641) $173,200 $732,000 $558,800 $3.50 209000 ($0.594) $162,700 $731,500 $568,800 $4 180000 ($0.497) $154,000 $720,000 $566,000 $4.50 150000 ($0.535) $145,000 $675,000 $530,000 e. Increasing the price from $3 to $3.5 would be a wise business decision as it helps to earn more profits. After increasing the price Bell Newspaper is able to generate more profit of 568800 – 558800 = $10000. As it is increasing the profits it would be wise to do so. Though the sales have decreased but still its helping to earn more profits so it is a wise decision. f. The profit chart looks as When we consider both the graph (above) and table in question d we see that the optimum price should be $3.5. This is because it is at this point that the company is able to earn maximum profit. The graph also shows that after this point the profits start to dip. So it it the optimum price they should charge. Charging more would result in reducing the profits. g. When Bell Newspaper reduced its price to $3 from $4 it resulted in increase sales. There sales as per data should have increased by 244000-180000= 64000. While their competitor Herald didn’t reduce the subscription. This resulted in the decrease in sales by 15000. This shows that consumers are price conscious. When they get a substitute at a lower price they switch over. This shows that there is a positive relation between price of Bell Newspaper and subscription of Herald Newspaper. Since, they are close substitutes and price affects the sale of other so there is a positive relationship between the two. Part B a. Market failure “is when the product or the service is not able to meet the expectation and is not efficient”. (Steve, 2008) It is a condition when manufacturers are looking for their own interest which is resulting in the final results not being efficient. It harms the society. “The product or service is not accepted by the society as it is not for the benefit of the mass but for self benefit of the manufacturer”. (Steve, 2008) The type of failure which relates to the car industry is Externalities: There is no complete information with every car maker. “This is leading to concentration of power as all car makers are not aware of methods to improve battery life, the efficiency and so on”. (Steve, 2008) This has affected it. Many companies bought patients. This hampered the process to spread information. Government Intervention: this sector needs government to come with remedies. “The electric car makers need government support in relation to what additional benefits the consumers will get, more reforms and harsh resolution that produce more carbons in the atmosphere”. (Steve , 2008) This will help people to make use of it. Charging problem: The car needs to be charged. “It creates a problem for the consumer as the batteries needs to be charged every time before the car leaves so charging and the mileage it will give is a problem”. (Steve, 2008) People are sometime uncertain how long they will travel. So batteries might go out. This is affecting sales. Lack of Infrastructure: Lack of charging points and substitutes when the batteries go out of life is affecting the sales. Lack of awareness: “Even the society is unaware of the benefits as it leads to less pollution and is safe”. (Steve, 2008) People are unaware the advantage it has. This is due to lack of promotion. This has also affected the sales. In the present normal market the equilibrium in price and quantity is not resulting in socially favorable outcome. This is due to the fact that “consumers have to pay more as there is no economy of scale because the production is less due to lack of demand pushing the cost of production”. (Varian, 1993) This is resulting in consumers paying more. As a result “Social Benefit is not equal to Private Marginal Benefit + External Marginal Benefit”. (Varian, 1993) b. The socially desired outcome for electric car would be that it gives maximum benefit. It will be achieved when “Social Marginal Cost = Social Marginal benefit”. (Varian, 1993) This will be achieved when the production cost falls. The government takes initiative. People become aware of the benefits. It will lead to bringing about a change in all factors. The action taken by the government will help to reduce failures. Policy makers are “making regulations to accommodate the increasing demand of energy and also addressing environmental hazards”. (Varian, 1993) Many new laws have been put in place. “Countries are working to reduce carbon emitted by coming with new stringent norms which will help electric cars to grow as it is eco friendly”. (Varian, 1993) Cars emit pollution. “Companies prefer their interest over the society which results in the curve to look as follows”. (Miller, 1997) It shows that the society is suffering. This is because “manufacturers prefer their benefits over the society”. (Miller, 1997) With interference from the government it is helping. With strict regulation it would prove beneficial. The government can give special benefits. The government can “give cash rebates or even deduction in taxes that use electric cars as it would help to save the environment”. (Miller, 1997) Even stricter norms “for people who emit large carbons by putting a cap on the emission will help to increase sales”. (Miller, 1997) By taking such decision the graph would change and would look like as follows (Miller, 1997) It will thus help to ensure that “both the society and manufacturer get the same benefit and this would result in cost being reduced due to economy of scale and there will be a match between the quantity demanded and the price thus benefitting the society”. (Miller, 1997) c. The other ways which will help the government to achieve the goals are Using carbon trading: this would ensure the amount of carbon every individual can emit. “People would be charged if they emit higher carbons and the rate which they are charged will increase as the emission increases and this will ensure people moving to electric cars”. (Maini, 2009) Since, it will reduce the emission people will shift. This will help to increase demand. This would ensure that the cost goes down. Thus equilibrium will be achieved. Incentive Plan: The government needs to give incentive to both the customer and manufacturer. Tax remedies can be provided to both. “The government can reduce the tax for manufacturers on the inputs and also for some time remove the tax”. (Maini, 2009) It should at the same time provide “customers with cash incentive or other measures which lure the customer to purchase it”. (Maini, 2009) The government should protect both. This will increase demand. Cost will fall down. The benefits will thus be shared by both. Infrastructure development: The government needs “to develop infrastructure by having more charging points and even changing batteries for cars whose batteries die out”. (Maini, 2009) This will ease the process. Consumers will be able to charge their cars. Having a replacement will help. This will spread word of mouth. With good infrastructure consumers will be happy. This will increase demand. The government needs to use strategies together. When placed together it will yield better result. It will help to achieve the goals. d. The car industry is investing heavily in this field. This is due to the fact that it is the future of car industry. With increasing pollution it has become must. To yield positive results the sector needs support. The support from the government would be a boom. It will help to build confidence. It will also help to take steps to improve. The government can be a great help. The problem currently faced is the cost to produce. It is high. This is due to lack of demand. Even data shows that demand has grown in the last few months. This is showing that consumers are becoming more aware. This would become doubly beneficial if the cost falls. The government should therefore “provide subsidy to the manufactures so that it is able to lower the cost of production”. (Terry, 2001) This is the need of the hour. It can be done by various ways like The government can reduce the tax. It can be done by “reducing the tax rate on the inputs and output so that the car is provided at lower rate”. (Terry, 2001) The government needs to “protect this industry as it is facing stiff competition from the other car manufactures that have captured the market which is resulting creating unhealthy environment”. (Terry, 2001) The government should provide “information relating to the development and assist in research and also look forward to develop the infrastructure”. (Terry, 2001) This will ensure more people purchase it. This will help to improve demand. The economies will then come into practice. This will help to reduce cost. When the companies are able to meet it the government remove this. This will help to achieve equilibrium. It is shown below Here we see that due to the steps taken the benefit shifts. It starts moving downwards. This results in both the consumer and manufacturer getting their share. This results in both the segment being satisfied. This thus helps to achieve equilibrium. References John M. 1999, “the concept of elasticity”, University of Canterbury, Netherland Maini C. 2009, “Development of next generation electric car”, Stavanger, Norway Miller T. 1997, “use of taxes on polluting activities to protect environment”, WW Norton Steve R. 2008, “the electric car”, CEO magnifying net, US Todd G. 1997, “A shortcut to economic literacy”, Internet Centre for Management and Business Administration, pg 43 Terry J. 2001, “from market failure to market based solution”, Federal reserve bank of Cleveland, pg 37-44 Varian H. 1993, “Intermediate Microeconomics”, Norton, McGraw Hill Read More