Market Failure - Government Interventions - Proportional - Equilibrium Price - Economic Assessment Answer

Market Failure - Government Interventions - Proportional - Equilibrium Price - Economic Assessment Answer 

Task:

1. A market failure occurs when the supply of a good or service is insufficient to meet demand. results in an inefficient distribution of resources among market participants. Hence, the government needs to intervene to bring efficiencies. Explain any four tools available for government interventions to deal with the market failures and which one will be applicable in the given situation.

a. Somewhere in the United States, there is a steel plant located next to a river. This plant produces steel products, but it also produces “sludge,” a by - product useless to the plant owners. To get rid of this unwanted by-product, the owners build a pipe out the back of the plant and dump the sludge into the river. The sludge produced is directly proportional to the production of steel; each additional unit of steel creates one more unit of sludge as well.

2. Suppose that the market demand for potatoes is given by Q = 1000 – 250P and the market supply of potatoes is given by Q = 150P, where P is the price per bag of potatoes and Q is the number of bags per month.
a. What are the equilibrium price and quantity for potatoes? Illustrate your answer graphically.
b. What is the consumer surplus at the equilibrium in part (a)? Indicate the area of consumer surplus in the diagram from part (a).
c. What is the producer surplus at the equilibrium in part (a)? Indicate the area of consumer surplus in the diagram from part (a).
d. In the context of the problem, provide three reasons why the demand for potatoes might increase.
e. In the context of the problem, provide three reasons why the supply of potatoes might decrease.

3. How does price discrimination reduce the amount of consumer surplus? By price discriminating the company charges some people a lower price, so how can this reduce consumer surplus?

4. The Organization of Petroleum Exporting Countries (OPEC) raised the price of crude oil in world oil markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. Long lines at gas stations became commonplace, and motorists often had to wait for hours to buy only a few gallons of gas.

a. What was responsible for the long gas lines? Most people blame OPEC. Surely, if OPE  not raised the price of crude oil, the shortage of gasoline would not have occurred. Yet economists blame government regulations that limited the price oil companies could charge for gasoline.

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