Elastic and Inelastic Demand, Negative Consumption and Production Externalities
Task 1
The demand for newspaper is inelastic while the supply for newspaper is elastic in the short run. This means the quantity demanded for newspaper does not respond strongly to price changes but the quantity supplied for newspaper is responsive to price changes in the short run. (Mankiw, 2009)
The demand is inelastic because newspaper has very few substitutes. Although online news is getting popular nowadays, the majority still prefer to read the papers. Besides, newspaper is a necessity which people read every day to know what happens around the world. Newspaper has a broadly defined market and it has no good substitutes. (Mankiw, 2009)
The supply of newspaper is elastic because firms that produce manufactured goods such as newspapers can run their factories longer in response to a higher price. (Mankiw, 2009)
From the graph, we can derive the table below: Without Tax With Tax Change
Consumer Surplus A+B+C A - (B+C)
Producer Surplus D+E+F F - (D+E)
Government Revenue - B+D + (B+D)
Total Surplus A+B+C+D+E+F A+B+D+F - (C+E)
Consumer surplus decreases by the area B and C while producer surplus decreases by the area D and E after a tax is imposed. Both tax levied on sellers and tax levied on buyers place a same size of wedge between the price that buyers pay and the price that sellers receive (Mankiw, 2009). Regardless of how the tax is levied, buyers and sellers share the tax burden (Mankiw, 2009). Buyers pay more and sellers receive less. Meanwhile the government revenue from collecting taxes increases by the area B and D. As a result, total surplus decreases by the area C and E causing a deadweight loss. Tax has made both consumers and producers worse off and it decreases the overall welfare of society. The equilibrium quantity falls after a tax is imposed causing the market of newspaper to shrink.
(300 words)
Task 2
Negative consumption and production externalities are considered harmful to society. A negative externality is
The demand for newspaper is inelastic while the supply for newspaper is elastic in the short run. This means the quantity demanded for newspaper does not respond strongly to price changes but the quantity supplied for newspaper is responsive to price changes in the short run. (Mankiw, 2009)
The demand is inelastic because newspaper has very few substitutes. Although online news is getting popular nowadays, the majority still prefer to read the papers. Besides, newspaper is a necessity which people read every day to know what happens around the world. Newspaper has a broadly defined market and it has no good substitutes. (Mankiw, 2009)
The supply of newspaper is elastic because firms that produce manufactured goods such as newspapers can run their factories longer in response to a higher price. (Mankiw, 2009)
From the graph, we can derive the table below: Without Tax With Tax Change
Consumer Surplus A+B+C A - (B+C)
Producer Surplus D+E+F F - (D+E)
Government Revenue - B+D + (B+D)
Total Surplus A+B+C+D+E+F A+B+D+F - (C+E)
Consumer surplus decreases by the area B and C while producer surplus decreases by the area D and E after a tax is imposed. Both tax levied on sellers and tax levied on buyers place a same size of wedge between the price that buyers pay and the price that sellers receive (Mankiw, 2009). Regardless of how the tax is levied, buyers and sellers share the tax burden (Mankiw, 2009). Buyers pay more and sellers receive less. Meanwhile the government revenue from collecting taxes increases by the area B and D. As a result, total surplus decreases by the area C and E causing a deadweight loss. Tax has made both consumers and producers worse off and it decreases the overall welfare of society. The equilibrium quantity falls after a tax is imposed causing the market of newspaper to shrink.
(300 words)
Task 2
Negative consumption and production externalities are considered harmful to society. A negative externality is
References: Bradsher, K. (2011, March 8). Mitsubishi is quietly cleaning up a former rare earth refinery. The New York Times. Retrieved from http://www.nytimes.com/2011/ 03/09/business/energy-environment/09rareside.html Mankiw, N.G. (2009). Principles of Microeconomics (5th ed.). Australia: Cengage Learning Mariam Mokhtar (2011, April). Ipoh and Pahang are sitting on a time bomb. Ipoh Echo, 117, 4. Tutor2u. (n.d.). What are externalities? Retrieved April 15, 2011, from http://tutor2u.net/economics/content/topics/externalities/what_are_externalities.htm