Markets and the Economics of the Public Sector Equilibrium of Supply And Demand
The equilibrium of supply and demand occurs when the amount of supplied goods complies accurately with that of the goods demanded. This equilibrium is a desirable economic condition for all the market players at any levels (individual, corporate, state). Thus, suppliers are able to sell the full quantity of the goods they have while consumers are able to get all the goods they need. In real-life settings, however, this condition is barely achieved and one of the sides has to operate under undesirable conditions (Wolski, Plank, Brevik, & Bryan, 2001). As a rule, the fluctuations of the equilibrium are described by the so-called “shifts” and “movements.” Shifts describe the change in the demand that occurs notwithstanding the price. If this is an increase of the demand, such shifts are desirable for suppliers, if this is a demand drop, such shifts are undesirable. Movements, in turn, describe the changes in demand that are stimulated by the price changes; otherwise stated, they show how equilibrium is established.
When the equilibrium of supply and demand is distorted critically, it is called disequilibrium. On the whole, the condition of the disequilibrium of supply and demand can be of two types: the excesses supply and excesses demand. In the former situation, suppliers produce more goods than consumers demand. This happens because they expect that all the produced goods will be consumed but, in their rush for additional profit, they set excessively high prices so that consumers refuse to buy the goods. In the latter situation, suppliers produce fewer goods than consumers demand. This happens because the prices they set are too low what makes their product available to an unexpectedly large population. The equilibrium is restored when the prices are set accordingly. The first situation is undesirable for the supplier group and the second situation is undesirable for consumer group; only the equilibrium of supply and demand suits both groups.
The Explanation of Key Concepts
Efficiency of Markets
There are two conditions ensuring the efficiency of markets. First, the goods are produced using the given amount of resources. Second, increasing the output is cannot be realized unless the input is likewise increased. The efficiency of markets guarantees an optimal use of resource allowing, in such a manner, the price act as a motivator of independent players. In other words, if consumers and producers can decide freely how resources should be allocated, prices will regulate the market in such a manner that resources will be directed towards those players who use them most effectively. For example, if consumers demonstrate higher demand for oil than butter, it can be expected that the price of oil will grow and the price of butter will fall. This will lead to inducing the production of additional oil and the forwarding more resources to oil and to decreasing the production butter and its resources.
Costs of Taxation
On the whole, taxes have a reducing effect on demand and supply. They stimulate the shift of the market equilibrium to the point where the price is higher with the tax than without it and the quantity is lower with the tax than without it (Lenzen, Murraya, Sack, & Wiedmann, 2007). If consumers have various options from which to choose, they are most likely to respond to the increases in tax-stimulated prices by consuming other goods. Producers are most likely to produce other goods if they are able to do so, or they might want to leave the business if they are unable to do so.
Benefits of International Trade
The economic benefits of international trade are that a greater amount of varied products is delivered to the world market at lower prices. This is determined by the objective difference between producers’ qualifications, the costs and availability of the required resources, and the intensive competition in general. Additionally, international trade provides for realizing the economies of scale that cannot be realized in the domestic market.
How Externalities Prevent Market Equilibrium and How Various Governments Policies Used Remedy the Inefficiencies in Markets Caused By Externalities
Externalities lead to market failure. Negative externalities demonstrate excess production and positive externalities is the sign of decreased production. For example, if a company produces carts and pollutes the environment, the pollution costs are shared by consumers because the cost of the cars is initially higher. This is an example of negative externalities. In this situation, the market failure occurs on condition that there are too many goods and their prices do not meet the real production cost of production. An opposite situation can be observed on the example of positive externalities. Thus, for instance, a person does a college program and covers its costs. In this situation, the positive externalities involve more tax revenues, lower crime rates, and general stability. These benefits, however, are not considered by a person when he decides to do the program. As a result, college programs are poorly consumed.
In response to these externalities, government policies need to be implemented to subsidize the college program market and to punish the car manufacturing market. However, they are not always effective because it is problematic to quantify these externalities and to understand what measure should be taken (the increase or decrease) and where it should be forwarded (consumers or producers). In the case of car producers, policies can exploit such methods as additional taxes, penalties, or related incentives, to name but a few. In the case of a college program, policies can exploit such methods as facilitated access to credits or subsidies (Franzese & Hays, 2006). An accurate prediction of externalities is vital to preventing market failure. Thus, government policies should be timely implemented to adjust costs and demand in an optimal manner.
The Difference between the Efficiency of a Tax System and the Equity of a Tax System
Efficiency of a Tax System
The efficiency of a tax system is necessary to minimize the tax-related impacts to which the economy is exposed. Thus, tax efficiency minimizes the administrative burden and the economic distortions that occur in response to the tax. In this regard, it should clarify that the key purpose of a tax system is not to collect taxes; instead, tax collection is a requirement that cannot be avoided. Thus, the minimization of the administrative burden is beneficial for both taxpayers and the economy in general. Another objective that tax efficiency helps to meet is minimizing deadweight losses. Despite the fact that the cost of the compliance with the tax code implies deadweight losses, a large part of them is incurred by the tax, particularly when this tax is associated with the working income.
Equity of a Tax System
Taxation equity is based on the fundamental principle of the fair nature of taxes. The key problem resides in deciding what principles to apply to determine the tax fairness. For example, the benefits principle suggests taxes should be paid proportionally to the benefits received.
The ability-to-pay principle, in turn, offers two alternatives: vertical equity and horizontal equity. The former suggests that people with higher incomes pay higher taxes. The latter suggests that people with higher expenses pay a lower tax than those with similar income but lower expenses. Finally, the principle of the marginal utility of money suggests that the money utility decreases with their amount increases.
- Franzese, R. J., & Hays, J. C. (2006). Strategic Interaction among EU Governments in Active Labor Market Policy-making. European Union Politics, 7(2), 167-189. doi: https://doi.org/10.1177/1465116506063705
- Lenzen, M., Murraya, J., Sack, F., & Wiedmannc, T. (2007). Shared producer and consumer responsibility — Theory and practice. Ecological Economics, 61(1), 27-42. doi: https://doi.org/10.1016/j.ecolecon.2006.05.018
- Wolski, R., Plank, J. S., Brevik, J., & Bryan, T. (2001). Analyzing Market-Based Resource Allocation Strategies for the Computational Grid. The International Journal of High Performance Computing Applications, 15(3), 258-281. doi: https://doi.org/10.1177/109434200101500305