Economic Issue Analysis
“Standard economic theory states that any voluntary exchange is mutually beneficial to both parties involved in the trade. This is because either the buyer or the seller would refuse the trade, if it won’t benefit both” (Millard, 2012, p. 11). Hubbard, Garnett, Lewis, and O’Brien, (2010) said that a competitive market achieves economic efficiency by maximizing the sum of consumer surplus and producer surplus. But that result only holds if there are no externalities in production or consumption. (p. 147) Millard (2012) demonstrates that an exchange can cause additional effects on hired parties.
From the perspective of those affected, these effects may be negative (pollution from a factory) or positive (honey bees that pollinate the garden). Negative consumption externalities is defined as when the private benefits to consumers of a product are greater than the social benefits of its consumption. There are spillover costs (external costs) resulting from the consumption of the product born by society as a whole. Millard also holds that welfare economics has shown that the existence of externalities results in outcomes that are not socially optimal.
In Poland, among 1,000 inhabitants, there are 383 vehicles. For the inhabitants, they benefit from the convenience with vehicles. If they want to go to shopping centre, there is no need for them to go on foot. As a result, time and energy are saved. However, in this case, the social benefits are far less than the private benefits. Poland experiences 49,500 road crashes per year. Current statistics show an average of 5,582 persons killed and 63,000 persons injured year. That translates to roughly 15 persons killed per 100,000 inhabitants (1 1 persons killed per 100 road crashes).
It means that when vehicle owners use road, they impose higher accidents risks on all other users. As the figures show, the inhabitants without vehicles are less than those with. Even though they do not use vehicles, they are still in danger. Negative externalities leads market to produce a larger quantity than is socially desirable. In the absence of externalities, the private benefits of the consumer are the same as the benefits for society. But if there is negative externalities, we must add the external costs to the demand curve (private benefit) to find the social benefit curve.
Because the benefit for society of consuming petrol is less than the benefit to private consumers, obviously the social benefit curve is on the left of the private benefit curve. This is shown in the diagram below (figure 1). The intersection of the supply curve and the social benefit curve determines the optimal output level. When taking the external costs into account, both the price (from Pl to UP) and the quantity (from IQ to SQ) of petrol decrease. It shows that the socially optimal output level is less than the market equilibrium quantity.
As a consequent, a deadweight loss occurs. The market is inefficient since at the quantity SQ, the social benefit is less than the private benefit. Petrol Consumption Price of Petrol Equilibrium Quantity of Petrol Supply Curve (Private Cost) Demand Curve (Private Benefit) Optimum Deadweight Loss External Cost Social Benefit (Private + Externalities) Figure 1 Social Cost (Private + Tax) IQ Market Demand Optimum Demand c Figure 2 In general, goods can be classified into two categories, good for consumers and bad for consumers.
The consumption of “bad” goods can give rise to negative externalities which causes a reduction in social economic welfare. There are a number of potential means of improving overall social utility when externalities are involved” (Millard, 2012, p. 12). What the government normally does is to try to reduce consumption of “bad” goods. More often than not, the government may decide to intervene in the market for these goods and impose taxes on producers. With high taxes, price is doomed to rise and as a result, it will lead to a fall in demand to some extent.
Millard (2012) explains that “A Opposing tax is a tax imposed that is equal in value to the negative externalities’ (p. 19). The tax is intended make the market outcome would be reduced to the efficient amount. In this case, in order to achieve the socially optimal output, the government can internalize the externalities by imposing a tax on the supplier to reduce the equilibrium quantity to the socially desirable quantity. By putting tax, the supplier will increase the price of petrol and reduce the quantity of petrol. So, the supply curve will shift to the left, which is labeled as the social cost.
This is shown in the diagram above (figure 2). When the tax regulation is introduced, it may reduce the emend for petrol. The suppliers may not be able to lower price as they have to pay tax, but they can reduce the quantity they supply. A big enough tax could offset the deadweight loss altogether. As is shown in the diagram, with levying tax, the deadweight loss reduces; even eliminates when the area A is equal to the area B and C. Then, the price to refuel the vehicles will be P and the quantity SQ, which satisfies the need of supplying the socially desirable quantity.
At this level, the market is back to efficiency. In 2009 alcohol was a factor in 32% of road deaths. Alcohol-related fatal crashes cost the Western Australian community in excess of $200 million each year. (“Office of Road Safety,” n. D. ) If you drive after drinking alcohol, the likelihood that you will be involved in a crash increases. Studies have shown that drivers are twice as likely to crash with a blood alcohol concentration (BACK) of 0. Egg/mall, seven times as likely to crash with a BACK of 0. Egg/mall, while a BACK of 0. 1 g/mall increases the probability of a crash by 25 times. “Office of Road Safety,” n. D. ) This is shown in the graph below (figure 3). Figure 3 Alcohol affects driving skills. It impairs the ability of concentration and perception, balance and alertness. The fact is that no one can drive as well after drinking alcohol. With the stimulation of alcohol, drivers are more likely to take the risk. Each year in Western Australia, more than 19,000 people are booked for drink driving. (“Office of Road Safety,” n. D. ) Therefore, alcohol has been identified as an important risk factor in road crashes.