One of the problems in a competitive market environment is deadweight losses. What are deadweight losses, and what are their causes? What are the market effects of a deadweight

respond to 1 of the discussion questions below and submit your response to the Discussion Area. Use the lessons and vocabulary found in the reading. Support your answers with examples and research and cite your sources using APA format.

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Discussion Question 1:

One of the problems in a competitive market environment is deadweight losses.

What are deadweight losses, and what are their causes?
What are the market effects of a deadweight loss?
What are the major factors that determine who will bear the burden of a tax or the incidence of a tax?

Discussion Question 2:

Adam Smith, usually referred to as the father of economics, expounded the theory of free markets and opposed any form of concentration of economic power. He believed that any authority establishing a price that provided a fair price to the providers of the factors of production would distort the market's natural ability to determine prices and output levels. In general, he believed that competitive markets would allocate resources to their highest and best use. However, in recent times, we have seen the market mechanism fail and allocate too many or too few resources to the consumption or production of some goods and services.

What are some of the reasons for this failure?
Has government intervention into competitive markets changed the efficiency of these markets? Why or why not?
Was Smith correct or incorrect in his theories concerning the efficiency of the markets in allocation of resources?
Justify your answer.

Start reviewing and responding to at least two of your classmates' postings

Government Regulations.html

Government Regulations

“Government affects what and how firms produce, influences conditions of entry and exit, dictates marketing practices, prescribes hiring and personnel policies, and imposes a host of other requirements on private enterprises. For example, local telephone service monopolies are protected by a web of local and federal regulation that gives rise to above-normal rates of return while providing access to below-market financing. Franchises that confer the right to offer cellular telephone service in a major metropolitan area are literally worth millions of dollars and can be awarded in the United States only by the Federal Communications Commission (FCC). The federal government also spends hundreds of millions of dollars per year to maintain artificially high price supports for selected agricultural products such as milk and grain, but not chicken and pork. Careful study of the motivation and methods of such regulation is essential to the study of managerial economics because of regulation’s key role in shaping the managerial decision-making process” (Hirschey, 2009, 418).

“Although all sectors of the U.S. economy are regulated to some degree, the method and scope of regulation vary widely. Most companies escape price and profit restraint, except during periods of general wage–price control, but they are subject to operating regulations governing pollution emissions, product packaging and labeling, worker safety and health, and so on. Other firms, particularly in the financial and the public utility sectors, must comply with financial regulation in addition to such operating controls” (Hirschey, 2009, 418).

Reference:

Hirschey, M. (2009). Fundamentals of managerial economics, (9th ed.). Boston, MA: Cengage Learning, ISBN13: 978-0324584837

A company must anticipate the changes in market conditions that will result from government intervention. The two tools the government most commonly uses to deal with market failure are taxes and subsidies. In addition, there may be penalties for a harmful activity or an extra cost to incur for the additional benefits from an activity that the company undertakes. These are considerations that management must take into account, especially in the long term.

Market Structures.html

Market Structures

Buyers and sellers come together in markets to exchange goods and services for either money or, in isolated cases, other goods and services. Economists have defined four market structures based primarily on the level of competition:

Perfect competition
Monopolistic competition
Oligopoly
Monopoly.

In perfect competition, so many companies deal in the same good or service that a single company does not have any influence over the price of the good or service. The only decision companies have to make is how much to supply based on the price determined in the market. There is no perfectly competitive company. However, most agricultural markets provide close approximations of how perfect competition would operate.

This is the most common market structure found in most economies. Here, there are many sellers of similar products differentiated in some way, and entry into and exit from the industry is relatively easy. The best examples are retail firms such as gas stations, fast-food restaurants, and clothing firms.

An oligopoly is a market structure that provides most of the goods in consumer markets. However, a given market has only a few of these companies. An example of an oligopoly would be airlines serving the same route.

In a monopoly, there is only one company in the market and that company has complete control over the price and output level. Monopolies are illegal in most countries, but where they are allowed, they are highly regulated by the government. Examples include electric companies, cable TV companies, and other utility companies.

Most companies do not fit into a single market structure. However, because the four structures have different pricing and output decisions, a company must be aware of the structure that is the best fit.

Competitive Markets.html

Competitive Markets

Competitive markets are assumed to efficiently allocate resources to the production of goods and services. However, competitive markets are not perfect. They often do not allocate resources to the production of socially desired goods, such as police protection, because people who receive such goods or services cannot be forced to pay for them. Alternatively, sometimes, the market allocates too many resources to harmful activities, such as production activities that pollute the environment at no cost to the producer. When either of these events occurs, it results in market failure. Market failure is often called an externality, which can be positive or negative.

Positive externalities are situations in which a third party benefits from a transaction between some other parties. For example as society in general benefits from a higher level of education in the workforce, the government intervenes and provides funding to encourage allocation of more resources to education—more than what the markets would allocate if left alone.

Negative externalities are situations in which part of the cost of providing a good or a service is borne by a third party to the transaction. Assume the production process of a product involves disposing of contaminants into the air. Those exposed to the contaminants may fall ill. In this case, while the company pays for electricity, raw materials, and other inputs, the individuals exposed to the contaminants bear the negative effects—medical expenses and poor quality of life—of air pollution.

Most companies are characterized as competitive companies to some degree and have some control over price and output. Perfect competition is a theoretical model and does not exist in reality. Given the following conditions, competitive companies make decisions regarding prices and output levels:

There are a large number of buyers and sellers.
The products are somewhat homogeneous.
Entry into and exit from the market are relatively simple.
There is non-price competition, that is, a company tries to distinguish its product from competing products on the basis of a factor other than price.

Harper Marsolek Competitive Market Environment: Deadweight Losses

Deadweight loss “occurs when supply and demand are not in equilibrium” (Tuovila, 2022). In economics within the market, there is a “deficiency caused by an inefficient allocation of resources” (Tuovila, 2022). This inefficient allocation of resources happens when goods in the market are over and/or undervalued (Tuovila, 2022). There are multiple causes of deadweight losses that include: price ceilings (price and rent controls), price floors (minimum and living wage), monopolies, and taxation (Tuovila, 2022). Price ceilings are set by the government and prevent sellers from charging a higher price for their goods and/or services (Agarwal, 2022). This cause of deadweight loss makes production of the goods less attractive resulting in the supply being lower than the demand (Agarwal, 2022). Price floors are conversely price controls that prevent companies from “charging less than a specific amount for the goods or services provided” (Agarwal, 2022). Monopolies cause deadweight loss because the profits are solely private and “accrue to the monopolizing firms” (Agarwal, 2022). In addition, monopolies set the price above marginal cost, which in turn can create a gap between the company’s costs and the consumers of the goods and/or services produced (Agarwal, 2022). Lastly, taxation are charges from the government that can dictate an increase in the price of products, which would directly decrease the demand for the good and/or service (Agarwal, 2022). These causes of deadweight loss are ultimately unavoidable to society, and can result in most individuals being impacted by this shift in the market when deadweight loss transpires.

Since deadweight loss causes market inefficiency, it effects both sides (consumers and companies) of the trading line. In the market, the consumer will be missing out on the goods and/or products to purchase as well as the companies that will lose potential revenue (Masterclass, 2022). When supply and demand are not balanced it effects the market in deficiencies. The market is directly affected by missed societal economic opportunities. Deadweight loss is significant to the market because it refers to how “society’s living standards and overall prosperity” are calculated (Agarwal, 2022). Deadweight loss affects the market by creating “excess burden” to society because this burden is how society’s “pays” for the loss. In the market, supply and demand strive to reach an equilibrium.

Tax incidence is the “division of the tax burden between stakeholders that include the buyers and sellers and/or producers and consumers” (Kagan, 2022). The shifts of supply and demand associated with price elasticity are the major factors that determine tax incidence (Kagan, 2022). It is important to note that price elasticity is directly correlated to how the buyer responses to the movement of price of a particular good or service (Kagan, 2022). In this case, “when supply is more elastic than demand, the tax burden falls on the buyers” and interchangeably, “when demand is more elastic than supply, producers bear the cost of the tax” (Kagan, 2022).

Ultimately, deadweight loss is an indicator that the economy is out of balance, which is caused by an inefficient allocation of resources. This leads to a change in consumer and producer behaviors. It is crucial to monitor deadweight loss from the consumer and producer standpoint to analyze for deficiencies to minimize economic loss.

References

Agarwal, Prateek. (2022, February 2). Deadweight Loss. Intelligent Economist. https://www.intelligenteconomist.com/deadweight-loss/

Masterclass. (2022, October 12). Deadweight Loss Guide: 7 Causes of Deadweight Loss. https://www.masterclass.com/articles/deadweight-loss-guide

Tuovila, Alicia. (2022, May 25). What Is Deadweight Loss, How It’s Created, and Economic Impact. Investopedia. https://www.investopedia.com/terms/d/deadweightloss.asp#:~:text=A%20deadweight%20loss%20is%20a,an%20inefficient%20allocation%20of%20resources.

Kagan, Julia. (2022, April 2). Tax Incidence: Definition, Example, and How It Works. Investopedia. https://www.investopedia.com/terms/t/tax_incidence.asp