Microeconomics

Microeconomics

What is the producer surplus, and how is it measured? What is the relationship between the cost to sellers and the supply curve? Other things being equal, what happens to producer surplus when the price of good rises?

Producer surplus is the difference between the acceptable price for a producer and a particular amount they get when they sell their goods in the market. It is also the benefit accrued by producers when they trade their products in the market (Mishan, 1968). The difference between individual sale and the market is that an own cost is arrived at by taking away the production costs from what is received after the purchase, on the other hand, market “is measured as the area below the market price and above the supply curve between the quantity sold and the origin” (Mishan, 1968). There are two reasons why producer surplus increases when the price of goods also increases. First, a higher price means there will be more sellers in the market; thus, sales will generate a surplus in production. Secondly, due to increased prices, there will be an increase in producer surplus experienced by the sellers.

Explain Arthur Laffer’s theory of tax rates relative to tax revenue. What is the effect of a tax on the deadweight loss? Why is it sometimes difficult to predict what will happen when a tax rate is decreased or increased?

The theory tries to explain the link between tax rates and the amount of revenue collected. Laffer’s theory states that through subsidization of tax rates, tax revenue can be increased. Laffer argues that high taxes are detrimental to taxed activities; thus, economic incentives and tax revenue can be increased through tax rate cuts. Deadweight loss is the harm caused by taxes to economic efficiency and production (Bunescu & Comaniciu, 2013). It is the scale of how reduced taxes affect living standards. Taxes lead to high production costs, high costs of goods and services in the market, and a reduction of returns from wages, rents, and inheritance. This results in low morale of saving, investing, or even taking risks. Taxpayers will spend most of their time attempting to avoid taxes. According to Laffer’s theory, habits have to be adjusted because of the incentives created by tax rates. High tax rates discourage people from going to work, while lower tax rates motivate people to go to work. Laffer argues that there is a reduction collection in revenue when the tax is high. Predicting the outcomes of tax increase or decrease is challenging because of two reasons. First, an increase in tax rates increases deadweight loss and distorts incentives. Second, although there may be an increase in market size due to decreased tax rates, an increase in revenue is not continuous.

Describe both quotas and tariffs. How do they impact domestic prices and deadweight loss? How does an import quota differ from an equivalent tariff? What is best for a nation as a whole: a tariff, a quota, or free trade? Explain your answer.

Tariffs are taxes imposed by the government on specific commodities. Quotas involve a restriction by the government on imported commodities by limiting the amount to be imported at any particular time. Both tariffs and import quotas lead to a rise in the locally available goods and a reduction in the number of imported goods from outside. Thus, by restricting the number of imported goods, quotas will improve the welfare of the producer and diminish the well-being of the consumer, which ultimately leads to deadweight loss. Quotas and tariffs are essential when taking part in international trade. They are quite useful when there is a need to regulate the number of imports into a country and the prices of goods. These two are essential in protecting the local industries as they would suffer from heavy competition from the imported products, which are mostly cheaper.

Although most economists agree that free trade is beneficial for a country, there are numerous arguments against free trade. Describe five of the arguments against free trade.

Free trade refers to doing away with government policies and discrimination on imports and exports. When these tough policies are eliminated, buyers and sellers can freely interact in the market without being limited by tariffs, quotas, and prohibitions on goods and services. Although freed trading governments also have measures that regulate imports and exports. The United States, for example, negotiates trade agreements with international trade partners to determine duties, tariffs, and subsidies the other trading partner can impose on their imports and exports. It should be noted that free trade has a record of promoting the growth of the economy even when tariffs are in place. Countries that are engaging in free trade continue to grow economically (Medrano & Braun, 2012). The lower cost of imported goods in the market enables consumers to get fair prices. Free trade also leads to increased investments for foreign entrepreneurs. Free trade agreements open up new markets for entrepreneurs in foreign countries. Moreover, free trade leads to new innovations and technology transfer.

As much as free trade may appear to be good, critics have pointed out several issues with the concept. Fist, according to critics, free trade limits the growth of the local industry. Most imported goods usually fetch lower prices in the market, thus lead to stiff competition between domestic and foreign sectors, eventually, the development of local industries difficulties and some often close down. Secondly, it is argued that overdependence is a factor of free trade. For instance, when one trading partner experiences an economic downturn, other trading partners within the free trade are likely to experience the same. Some countries have impositions on free trade because of weaknesses that threaten to bring in illegal substances such as narcotic drugs. Fourthly critics point out that while developed economies continue to reap benefits from free trade, the less developed economies suffer from the effects of free trade. Lastly, the loss of intellectual property has been associated with free trade. Less developed countries fail to take importance into intellectual rights, thus, ultimately lead to the stealing of innovative ideas and new technology, resulting in enmity and hostility between the countries.

Describe the Coase theorem, which suggests that efficient solutions to externalities can be arrived at through bargaining. Explain how this happens. Under what circumstances does bargaining fail to produce a solution?

As the name suggests, Ronald Coase was the developer of the Coase theory. He argues that there are right conditions where parties in dispute over intellectual property can be able to negotiate and arrive at a neutral solution. Coase suggests an approach through which competing businesses can resolve their conflicts (Allen, 2015). However, this theory has several weaknesses. It is difficult to come to an understanding when both parties are significant. Moreover, the negotiation process may be influenced by the initial property rights. The theory is only applicable under zero transaction cost occurrence and efficient, competitive markets.

Why do wild salmon populations face the threat of extinction while pet goldfish populations are in no such danger?

Salmon fish is sold on profit by fishermen. Being motivated by profits, the fishermen decide to catch as much salmon fish as they can; the more the salmon fish they have, the more benefits they can accrue. On the other hand, goldfish are also sold on profit, but they owned and bred privately. To be able to obtain large profits from the sale of goldfish, they will have to ensure they increase their numbers.

Define and explain the terms of income tax and consumption tax. What would be the benefits of taxing consumption and not income?

Income tax is the imposed tax on businesses and individuals. The law requires that taxpayers to annually file their income tax returns, thus taxpayer will be tax compliant. Income tax revenues are what the government uses in the financing of public projects such as paying government obligations, the building of public hospitals and schools, among others. The tax imposed on goods and services is referred to as consumption tax. It takes various forms, such as sales taxes, tariffs, and taxes on consumer goods. Consumer taxes may include value-added tax, taxes on gross business receipts, excise duties, and import duties. Consumption tax is meant to instigate a culture of saving, this is because only items that are bought by consumers are taxed, but when the money is saved, it is untaxed. Critics to consumption tax point that only high-income families stand to benefit from this principle of taxing.

List the federal government’s three most important sources of tax revenue. How do these differ from your state government’s three most important sources of tax revenue and those of local government? Why do you think that these different government entities use different tax bases?

Payroll taxes, income taxes, and corporate taxes are the main revue sources for the federal government. Corporate tax involves the periodic tax imposed by the government on profits made by companies. Tax returns calculations are applied in the cases of the business tax obligation. Income tax involves the tax imposed on businesses and individuals, on the other hand, payroll tax involves the tax deducted by an employer from a person’s salary, this is later paid to the government on the employee’s behalf. Payroll tax is calculated according to a person’s salary; this means that as the employee salaries rise, so does the amount of tax paid to the government. The local, state, and federal governments employ different tax based on each of their specific needs. Local government revenue is derived from property sales, charges and fees, state transfers, and federal governments. On the other hand, state government revenue arises from sources such as sales, income, charges and fees, and the federal government.

Examine the table at the following link, which shows what four consumers are willing to pay for a haircut: In the most efficient world, which companies should cut hair and which customers should get a haircut? (Note: It might be less than four.) How large is the maximum possible total surplus, and what is the least likely surplus?

These are the customers that should get a haircut, Oprah, Ricki, and Jerry. Companies that should be involved in hairstyles include; D Kutz, A Kutz, and, C Kutz. The maximum surplus for the above three is nine dollars. The minimum amount for Montel, Jerry ad Oprah to get a haircut at D Kutz, A Kutz, and C Kutz is five dollars, and the minimum amount is seven dollars.