Markets and the Economics of the Public Sector

Marketsand the Economics of the Public Sector

Marketsand the Economics of the Public Sector

Anequilibrium of supply and demand is a desirable aspect of business.The inter-reliant affiliation between the supply of a particular goodor service as well as the general demand achieved by the partiesinvolved creates a hypothetical equilibrium point. This equilibriumdictates the normal market price. It also influences the volume ofproducts and services purchased at that particular price.

Inan ideal static market, it is logical to make an assumption thatproduct volumes and prices will remain consistent and predictable tothe consumers. However, in reality, these aspects are not static.This is because the market constantly fluctuates regarding supply anddemand. The elements are exposed to various driving influences andforces. These fluctuations play a significant role in changing themarket equilibrium product volumes and price points.

Asa result, they need a consistent awareness and adaptation by bothconsumers and providers. Therefore, static pricings lead to theheightened acquisition of the products or services. In other words,consumers prefer fixed prices. On the other hand, suppliers alsodesire constant demand. In that regard, achieving an equilibriumbetween supply and demand is a preferable outcome for both consumersand suppliers [ CITATION Jos11 l 1033 ].

Thedemand fluctuations are influenced by the goods or service beingprovided at a particular price. It results in changes in bothquantity and pricing. An increase in demand frequently leads to arise in prices as well as volume, thereby raising the metrics virtualto the previous equilibrium point. Similarly, a limited demand leadsto a decrease in demand and the volumes.

Consumerbehaviors primarily influence the market fluctuations. They depend onthe spending prowess of the consumers, demographic effects, culturalchanges, politic, advancement in science, availability ofsubstitutes, and environmental concerns. Supply, on the other hand,is dependent on certain product or service available to satisfy aparticular demand. An increase in supply lowers the prices since thevolume of products is high. Likewise, when the supply is low, theprices are increased, especially when the demand is high. Combiningthese two aspects impacts on the equilibrium. Therefore, in anymarket, a static equilibrium is favorable to both parties [ CITATION Jos11 l 1033 ].

Theconsumer surplus concept implies that the customer pays less thananticipated. The amount a consumer spends is dependent on the marketprice. From the description, it is evident that there is a net gainfor the customer. The producer surplus concept describes theadditional benefits like profits acquired by the producer. When themarket price is higher than the anticipated minimum price, theproducers get profits that are regarded as surplus. The consumer andproducer concept can be driven by market efficiency.

Marketefficiency does not need the market price to be equal to the actualvalue at all the points. It only states that the market price shouldbe unbiased. In other words, the prices ought to be random and notdefinitive. Such a scenario can lead to consumer or producer surplus.For instance, the consumer might by planning to purchase an item at acertain price. However, on reaching the market, the price ends upbeing less than predicted. The consumer purchases the item at a lowerprice than earlier anticipated. Likewise, since the market price isvolatile, a producer might sell a commodity at a higher price thanearlier expected [ CITATION Lou111 l 1033 ].

Thetaxation costs can also influence consumer and producer surplus. Allcitizens are reliable to paying taxes. Thus, when an ordinary tax isincreased, it should be spread over to all the citizens and not onlyone individual who on his own will find such an increase to be veryoppressive. On the other hand, if a tax is reduced, no one individualmay recognize a significant benefit. Even if several people noticethe increase in the costs, or otherwise the benefits of a decrease inthe cost of tax, efforts to mobilize the other taxpayers to take aneffective political action would end up being difficult. Thisexplains why taxation costs are largely ignored on the politicallevel [ CITATION Ati11 l 1033 ].

Anothercost of taxation includes the administrative ones incurred during thecompliance period for the change in tax. The amounts of resourcesused by the government to administer the tax are often high.Moreover, most taxes often create a wedge between what sellersreceive and what the buyers pay. In most cases, consumers pay morethan what producers receive. This is because of the imposedgovernment sales taxes. Similarly, employers also pay more than whatemployees receive due to the mandatory income taxes.

Thus,some production and efforts are worth more than the value attached tothem. Such value sacrificed is referred to as the deadweight cost oftaxation. The deadweight cost of taxation is often greater when a taxsystem has underlying loopholes. Where some products or services aretaxed heavily as compared to others, citizens will mostly favor thepersons who are taxed less even though they are of less value thanthe heavily taxed ones [ CITATION Ati11 l 1033 ].

Internationaltrade allows a country to have different varieties of a particularcommodity originating from various countries of production. Thisallows consumers of a particular country to have the diversity of aproduct. By having a variety of goods, the consumers’ quality oflife will improve. The effect usually will lead to the growth of thecountry at large. International trade will generate employmentopportunities for the country exporting.

Thisis because of the rise in the target market for the particular goodsunder consideration. It also helps in creating employment by way ofthe establishment of more industries that cater for the demands ofthe several markets being served. This helps countries to reduce therates of unemployment. By engaging in international trade, countriescan sell surplus goods and services to foreign, hence earning someinternational exchange [ CITATION Lou111 l 1033 ].

Internationaltrade enhances the domestic competitiveness of the production processand production. Countries can also take advantage of internationaltrade to improve on their technology. This will lead to increase insales, hence higher profits. By engaging in international trade,countries maintain the cost competitiveness in their domesticmarkets. This largely benefits consumers as they can get qualitygoods and services at an affordable price. International tradestabilizes the seasonal fluctuations in the market for particulargoods and services. This largely translates to constant supply, henceavailability of products and services [ CITATION Lou111 l 1033 ].

Externalitiesare the tiny, indirect effects resulting from production,consumption, and the investment decisions made by individuals andfirms which affect people not involved in a transaction. These tinyeffects often end up being problematic. Externalities, in the longrun, result in market failure. This is because price equilibriumwould not reflect the true benefits and costs of a good or serviceaccurately. Equilibrium is often supposed to result in optimality onthe levels of production. It requires finding an ideal balancebetween the producers’ costs and the buyers` benefits. However,with the presence of significant externalities, the equilibrium levelis disrupted, leading to market failures [ CITATION Lou111 l 1033 ].

Withthe presence of negative externalities, producers do not put up withall costs. This results in excess production. In consideration ofpositive externalities, producers do not get the benefits ofproducing the good. This will result in a decline in productionlevels. Externalities lead to either an increase or decrease inproduction or consumption.

Governmentshave several criteria for reducing the impact of negativeexternalities while promoting positive externalities. Governmentinterventions are classified as either command-and-control policiesor market-based policies. Direct controls involve control policieswhich prohibit some specific activities that are known for creatingnegative externalities. They limit or eliminate the negativeexternalities. They include policies limiting emissions of harmfulelements or toxic wastes [ CITATION Ati11 l 1033 ].

Onthe other hand, a government can promote the positive externalitiesby giving subsidies to producers or sellers which are market-basedpolicies. Grants to buyers would lower the cost of the productincreasing demand. By providing subsidies to the producers, the costof production would be reduced thus increasing supply. A governmentcan also give tax breaks to either the buyers or the suppliers. Thegovernment can also issue out industrial policies which promotespecific technologies which have the greatest benefit to society [ CITATION Ati11 l 1033 ].

Anothermarket-based policy is to reduce negative externalities by assessinga corrective tax. This is a tax which internalizes the externality.It incorporates the tax as a cost of production. The corrective taxesare also called Pigovian taxes. The main advantage of such correctivetaxes is that most companies will have an incentive to satisfy theregulation. Moreover, the corrective taxes will motivate companies toconsistently reduce their negative externalities to lower their coststo the market.

Taxefficiency entails the cost of complying with the taxation policiesof a country. An efficient tax system ensures for a reducedadministrative burden of implementing the tax policies. Taxefficiency can be attained by minimizing distortions in an economythat can result from implementing the tax. By reducing theadministrative weight, it will not only benefit taxpayers but theeconomy at large. This is because tax collection would not be themain objective of the tax policy, but a requirement [ CITATION Ati11 l 1033 ].

Otherthan only promoting or limiting particular activities, the complexityof the tax practices results from preferential treatment to specificgroups, especially wealthy individuals and big corporation. Suchpreferential treatments if not provided based on how a tax isstructured, it will create loopholes allowing taxpayers to takeadvantage of the identified weaknesses. By avoidance of tax due tothe loopholes, funds raised will be lower than intended. Taxationequity, on the other hand, is an applying principle that requirestaxes to be fair.

However,several factors are used to determine the fairness of tax. As per thebenefit principle, people are supposed to pay taxes depending on thebenefits which they get from the government services. The law can beviewed to have two frontiers which are the vertical equity andhorizontal equity of tax. The principle of Vertical equity requiresthat citizens having higher incomes should be paying higher taxes andvice versa. The provision caters for an increasing marginal tax ratefor higher income [ CITATION Lou111 l 1033 ].


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Ugur, A. (2011). Internalizing Externality in the Case of Joint and Separate Productions: Property Rights Regulation as the Public Economy Solution. International Journal of Business and Social Science, 47-60.