Economic Efficiency and Principles

How economics would approach the problem of alcohol abuse

Drug abuse is a problem that faces most countries. Various groups of people have suggested a number of ways to resolve the problem. Examples of ways that can be used to solve the problem of alcohol abuse are scientific, social, medical, and economical ways. Economists view drug abuse as an actual scenario of negative externalities in production and even consumption. Further, the production of drugs creates pollution in the environment.

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This leads to environmental degradation. Therefore, an economist will focus on how to address the negative externalities caused by the consumption and production of alcohol. For instance, an economist can consider using Coase theory. The theory proposes that compensation should be paid to the alcoholics without involving the government. This can only be achieved when the cost of negotiation is within reasonable limits. Compensations can entice the alcoholics to quite alcoholic. Another approach that an economist can use is imposing Pigouvian taxes. These are regulations and laws that can be imposed on either production or consumption of alcohol.

The government can control the quantity of alcohol being produced within a given period of time. Further, the government can restrict the consumption of alcohol. Alcohol abuse can also be controlled by regulating the amount of alcohol being sold to consumers. Therefore, economists can address the problem of alcohol abuse in these two key ways (Mankiw, 2011).

How prescription drugs affect the demand and supply of other products in the industry

The impact of prescription drugs on the demand and supply of other products in the market depends on the relationship between prescription drugs and other products. Assume that the demand for other products in the industry (such as over the counter drugs) is directly related to the prescription drugs that is, they are substitutes. This implies that they cannot be used together, one product is used in place of the other.

An increase in the production and supply of prescription drugs will result in to decline in demand for the other products in the industry since consumers would prefer to use prescription drugs. A decline in demand for the other products results in a decline in supply. Further, a decline in the supply of prescription drugs leads to an increase in demand for other products in the industry. An increase in demand exerts pressure on supply to increase. This leads to an increase in supply (Wessels, 2006).

Impact of elasticity on a shift of demand and supply curve

Elasticity measures the responsiveness of changes in demand and supply as a result of a unit change in the price of goods and services. A shift of the demand and supply curve is caused by changes in other factors that affect demand and supply other than changes in price. For instance, an increase in tax cases a shift of both the supply and demand curve. The changes that will occur on demand and supply depend on the elasticity of demand and supply. If the demand for the commodity is inelastic, then a buyer is likely to pay more prices since the seller will shift the whole burden to the buyer. Similarly, a supplier will pay more if the supply of the commodity is inelastic. This implies that a change in price will be more than the change in quantity demanded or supplied (Wessels, 2006).

Increasing cost industries in the state of Florida

An increase in the cost of production is commonly caused by a lack of adequate factors of production. The increasing cost of production is a characteristic of diseconomies of scale. Examples of industries in the state of Florida are labor-intensive industries. The companies face a declining supply of labor, thus making the cost of labor high. Another industry that experiences an increase in the cost of production is the oil drilling industry.

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The increase in the cost of production in the industry results from numerous regulatory requirements. In these industries, an increase in the amount of output produced increases the cost of production, thus yielding a positively sloped supply curve (Taylor & Mankiw, 2006).

Economic efficiency of a perfectly competitive market

A perfectly competitive market structure denotes a market selling homogenous products. The market is characterized by an infinite number of buyers and sellers. Further, there is no barrier to entry and exit. Besides, there is the existence of perfect information in the market. Sellers do not have influence have prices in the market. They are price takers. This implies that they take market prices as given. In terms of production, perfectly competitive markets are not efficient in the short run because they operate at the point where marginal cost equals the average cost (MC = AC). In terms of allocation, the market is efficient since it operates at the point where marginal cost equals marginal revenue (MC = MR).

However, in the long run, perfectly competitive markets are efficient since they operate at the point where price equals marginal cost (P = MC). Therefore, a perfectly competitive market is economically efficient at the point where P = MC (Wessels, 2006).


Mankiw, G. (2011). Principles of Economics. USA: South – Western Cengage Learning.

Taylor, P. & Mankiw, G. (2006). Economics. London: Thomsons Learning.

Wessels, J. (2006). Economics. USA: Barron’s Educational Series.

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