To an economist, the problem of alcohol abuse is viewed as an externality in both consumption and production. The value to consumers is greater than the value to society. Alcohol consumption is linked to many social problems, and addressing these problems diverts a significant amount of resources that could have been used in other productive activities. The two potential solutions include the use of taxes or Pigouvian regulations.
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These will help to raise the cost (price) of alcohol consumption through increased taxes and reduced availability. The second solution relates to imposing tariffs on producers involved in the production and sale of alcohol. Such a policy reduces alcohol consumption because the producers transfer the taxes to the final consumer, making alcoholic beverages more expensive for the consumers (Lipsey & Courant, 2008).
Garrod and Willis (2007) note that the law of demand and supply is one of the most primary principles that run an economy. Prescription drugs are those types of drugs that the government regulates through legislation, and they are not sold over the counter. Consequently, the cost of prescription drugs is related positively to the cost of health care in the economy. When the cost of health care is high, prescription drugs will take a big portion of the consumers budget, leaving less income for the other goods and services. Similarly, if the prices for prescription drugs are low, more money will be available to spend on other goods and services.
Significance of Elasticity of Demand in Analyzing the Impact of a Shift in Supply
Price elasticity of demand measures the degree of responsiveness of quantity demanded to changes in prices. Quantity demanded is determined by individual preferences, psychological variables, and social factors. When an increase in the price of a service or a product leads to a proportionately larger decrease in the quantity demanded, the demand is said to be elastic. On the other hand, demand is said to be inelastic when an increase in the price of a product or service does not significantly reduce the quantity demanded. Demand elasticity is a significant factor in analyzing the effects arising from shifts in supply.
For instance, when the demand for a given good or service is inelastic, an increase in tax entirely falls on the consumer. Suppliers react to the increased tax by increasing the price of the product, and the demand remains unchanged. On the other hand, when demand is inelastic, in a situation where a product or service has alternative purchases, the suppliers will incur the entire tax burden because increasing the price will result in a decrease in demand (Lipsey & Courant, 2011).
Significance of Elasticity of Supply in Analyzing the Impact of a Shift in Demand
Price elasticity of supply measures the degree of responsiveness of quantity supplied to changes in prices holding other factors constant. The elasticity of supply is of significance in analyzing the impacts of demand shifts (Lipsey & Courant, 2011). For example, if the demand for rental houses increases, the economy will face a shortage of rental apartments at the original price. Consequently, rental prices will increase. The increased demand pushes prices up, implying that suppliers respond to price increases by increasing supply.
Examples of Increasing-Cost Industries and a Preposition of Why They Would Have a Positively Slopped Supply Curve
The increasing cost industry represents a perfectly competitive industry that has a positively sloped supply curve. This can happen because either the industrys expansion increases the costs of production and prices for factor inputs (diseconomies of scale) or because of a shortage in the factor inputs. For instance, the increase in demand within the computer industry implies that consumers are willing to pay a higher price. Existing companies in the industry, such as Dell, HP, Toshiba, and Acer, will increase their respective quantities supplied. An increase in prices motivates suppliers to increase output; the supply curve shifts outwards.
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The supply curve for the industry will be positively sloped because salaries and wages for computer engineers and programmers have increased, pushing up the total production costs. The second example relates to an industry, which is suffering from an insufficient supply of labor. To increase the volume of output produced, the industry will have to increase wages to attract labor, leading to increased production costs and a positively sloped supply curve.
Conditions under Which a Perfectly Competitive Market is Economically Efficient
A market is said to be perfectly competitive if no players in the market possess market power such that they can influence the price of a product or service. Economic efficiency is achieved in a perfectly competitive market because the ability and willingness of the buyers to buy any volume of a given identical service or product at a set price are not restricted. Similarly, the ability and willingness of the suppliers to bring their products and services to the market at a given price level are not restricted. A perfectly competitive market permits adjustments to reflect the changing market conditions given that factor inputs are variable in the long-term. In the long-term, all producers and consumers know the price and quantity of the product with certainty. This makes all the trading parties better off.
Garrod, G. & Willis, K. (2007). Economic Valuation of the Environment: Methods and Case Studies. London: Edwards Elgar.
Lipsey, G. & Courant, N. (2008). Impacts on Future Environmental Economics. New York: HarperCollins Publishers Inc.
Lipsey, G. & Courant, N. (2011). Cost-Benefit Analysis. New York: HarperCollins Publishers Inc.