ECO 201 Project Section 2 Week 4 Assignment

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Southern New Hampshire University *

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201

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Economics

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Feb 20, 2024

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Competitive Markets and Externalities The above is a copy of my worst and best of the first simulation, externalities without policy interventions. Selling the first dog always seemed to be easier than selling the second. It was pretty easy to get what I was asking for with the first dog because the cost of creating the dog was cheaper, so I was able to sell it for more even though my price was less than others. In the second round when the cost to create the dog increased, I was having a hard time selling at that same price or higher and ultimately had to accept the highest offer before the time ran out if I was going to make a profit at all.

Above is the worst and best of the second simulation, externalities with policy interventions. Similar to the first simulation selling the first do was easier because the cost to create the dog was lower, but the added tax drastically affected the profitability of selling the dogs. By the second dog I was actually losing money in an effort to sell the dog because of the increased cost to produce the dog on top of the taxes. By round two I had made the decision that I would only sell the second dog if it generated a profit. That led to a surplus in dogs because I could never get anyone to accept the offer even when the profit would have been $0.01 because the price was higher than other sellers. A market failure refers to the inefficient distribution of goods or services in a free market. In a free-market prices are determined by supply and demand and are intended to lead to a price equilibrium, however, lack of information, market control, public goods, and externalities can lead to market failure (Mankiw, 2021) . Theses failure can be corrected through government interventions like command-and-control policies, such as criminalizing the dumping of poisonous chemicals into a water supply; imposing corrective taxes and subsidies, such as the gasoline tax imposed to help reduce the traffic congestion by encouraging people to us public transportation; and trade restrictions, such as tradable pollution permits which is a voluntary transfer of the right to pollute from one firm to another where the total amount of pollution stays the same (Mankiw, 2021) .

When government intervention affects the supply and demand equilibrium there is a shift in pricing and quantity of available products. This can happen by way of putting price ceiling and floors, charging taxes, imposing quotes, and even reshaping the economy. In the simulation, there is a producer surplus in the difference between the cost of making the dog and its sales price. In the second simulation taxes were introduced making the dogs hard to sell where the producer comes out as profitable as they were previously. The prices that the buyers were willing to pay were less than what I was offering by the sell of the second dog resulting in most of the second dogs not being sold. For the buyer, the surplus was the amount they were willing to pay for the dog minus the amount the seller pays to create and sell it, and for the seller the surplus is the amount they pay minus the cost of production (Mankiw, 2021) . The imposition of taxes can be seen as a result of government interventions on both consumers and producer’s surplus. Referring back to my example used earlier with the gas tax and going a step further; a gas tax may encourage consumer to start buying electric cars (substitutes for gas cars) reducing the amount of purchases of gas cars, this in turns effects the sale and production of gas cars. References Mankiw, N. (2021). Principles of Economics, Ninth Edition. Boston: Cengage. Ross, S. (2021, August 22). How Is a Market Failure Corrected? Retrieved from Investopidia.com: https://www.investopedia.com/ask/answers/042115/how-market-failure-corrected.asp#:~:text=Market%20failures%20can%20be %20corrected,%2C%20subsidies%2C%20and%20trade%20restrictions.

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