How The Deadweight Loss Is Caused: Answer And References

Deadweight loss caused by increased toll and fall in the number of cars using the highway

How The Deadweight loss is caused?

The Deadweight loss is caused by the increased toll, which is in turn the net cost to the society. The net cost to the society is also caused by the fall in the number of cars using the highway. The value of the deadweight loss is as follows:

The remaining drivers paid the increased toll which is equal to (0.50 – 0.40) (40,000). This can be viewed as the transfer from the drivers to the government.

(b) The savings of the government is equal to $25,000. This is mainly because the government purchased less concrete, which is counterbalanced by the reduction in surplus received by the producers of concrete. The size of the yearly loss of the producers of concrete is as follows:
The usage of less concrete by the government leads to savings that is equal to
 $25,000 – $250
 $24,750.

The reduction in the budgetary expenditure of the government provides a good approximation of the social value of the savings. It mainly results from the reduction in the procurement of concrete. Both the members as well as the non-members of the government who purchased the concrete will mainly gain from it as there has been a 50 percent in the price of the concrete.

a) The marginal cost is $25 and it is independent of number of oil changes sold. Therefore, MC curve will be horizontal. The demand curve will be steeper as the price elasticity is less than 1 (Baumol and Blinder 2015). The social cost of hydrocarbon emission in air is $10, therefore, the supply curve (MC). This situation is represented in the following diagram.

b) Due to tax imposition, the price of oil change will increase. The revenue of the chain of garages firm before tax imposition was $25 × 10000= $2,50,000 per year.

Due to rise in price, the demand will also increase. The elasticity of demand is -0.5. Due to tax imposition change in price will be $10 per oil change.
We know that, Price Elasticity = % Change in Quantity ÷ % change in Price.
Therefore, % Change in Quantity = Price Elasticity × % change in Price
% change in Price= (Change in price ÷ previous price) × 100 = (10 ÷ 25) × 100 = 40%
Hence, % Change in Quantity = -0.5 × 40 = -20%

The quantity will reduce by 20%. The changed quantity will be 10,000 – (20/100) × 10,000 = 10000- 2000 = 8000 oil changes per year. The revenue of the chain of garages firm after tax imposition is $35 × 8000= $2,80,000 per year
Hence, the annual net benefit will be ($2,80,000 – $2,50,000) = $30,000

In the absence of government intervention, the firm faces a deadweight loss that results from natural monopoly. It is a situation where one firm dominates the entire market. The natural monopoly arises because the firms cannot easily enter the market due to high cost and economies of scale. Deadweight loss is a situation where the society that includes consumer and producers face loss (Mallick 2014).

Two government policies that can reduce the deadweight loss resulting from natural monopolies are:
The first policy is to increase the competition in the market by opening new public sectors. New firms will help in reducing the unnecessary rise in the price therefore reducing the loss in consumer surplus. Hence, the firm will reach new equilibrium level where the price is equal to marginal cost and average cost.

The second policy that the government can use is by giving subsidies to the producers to reduce the loss in producer surplus. Subsidies again will help in reducing price that in turn will reduce the deadweight loss faced by society (Mallick 2014).

c) The main benefit of natural monopolies is cost advantage that it has. Cost advantage in case of large firm is known as economies of scale. It can be explained with a help of a diagram:

$5 per hour is the minimum wage that is above the level of market clearing wage $4 per hour. The reservation wage is $1. At market, clearing wage 600 people are employed. At $5, the numbers of employed workers are 500 and unemployed workers are 300. Therefore, the supply of employees is 500 + 300 = 800.
Due to change in policy, the surplus of the firm has been reduced by the area “aihd”. The dollar value of this area can be calculated by dcih + acd.
→ (5-4) × 500 + ½ × (5-4) × (600-500) = 500 + 50 = $550
Therefore, change in firm’s surplus is -$550.

Due to change in policy, the surplus of the employees will be change from “agi” to “dbgi”. The new area “dcih” will be added to its surplus but it will loss an area of “abc”. The old surplus of the workers was agi = ½ × (4-1) × 600= $900.
At the minimum wage, the dcih= (5-4) × 500 = $500 will be added and abc= acd = $50 will be subtracted from the previous surplus. The total change of worker’s surplus will be, $500 -$50= +$450.

Therefore, the area “acd” and “abc” is going neither to firm nor to the employees. Therefore, the area “abd” is the total loss to the society. The dollar value of this loss is acd + abc= $50+ $50 = $100.
Hence, deadweight loss due to the minimum wage policy is $100.

Various factors affect the cost of building new road. This includes shifting of old gas stations from the older road to new routes. Shifting of gas stations has a heavy impact on the component of cost building of the new road. The factor includes building an appropriate place beside the road for the gas stations. Gas stations are built at a place where there is a provision for reservoirs to store the gas. The place should be safe and it should be easily accessible to the vehicles. The gas stations must have proper roads and facilities to deliver the gas to the vehicles. These requires high amount of manufacturing costs and the government had to build these provisions for the gas stations.

The government also had to put up signboard and directions of the petrol pump, so that the vehicles can have an idea of the newly built petrol pumps. Another important factor that would be treated as a component of the cost of building the new road is showing these petrol pump in the maps and GPRS system (Li et al. 2013). The government had to communicate with the respective departments to upgrade the locations of the new petrol pump. Another factor that could be treated as a component of the cost of building new road is demolishing the old petrol pumps and the carrying cost of the gas from the old stations to new stations. These factors require high safety measures. They are highly priced, thereby increasing the cost of building.

In the case of the society, the cost-benefit analysis is a logical method that helps a society to make a decision related to any complicated issue. The cost-benefit analysis is mainly based on the cost of action compared to its benefit. The increased sales of the local business can be assessed by calculating as well as considering the benefits against the cost. In this case, the analyst needs to consider the relevant period of time (Roosen 2014).

The analyst needs to establish the base as well as the relevant period in order to calculate the cost and the benefit. The local business will be benefited from the Raven games if the marginal benefit equals the marginal cost. In the above diagram, it can be seen that the marginal cost equals the marginal benefit at the point Q. The surplus is highest at the equilibrium that is at point 1. At this point, the marginal benefit will be less than the marginal cost. However, at point -1 the marginal benefit will more than the marginal cost and as a result, the surplus will be lost. This will in turn lead to inefficiency.

The welfare mothers are required to pay only $3 every day for a child. However, this service requires the welfare mothers to wait for a longer period. The welfare mother agrees to wait for that long, which suggests that the welfare mothers have the willingness to pay over $3 each day in order to acquire this service.

As a result, the welfare mother who gets the benefit of day care service by receiving the service will consider this service valuable of more than $30,000. However, none of the welfare mothers has the willingness to pay $30 for a child on each day basis. This in turn suggests the value that the value received by the welfare mothers is less than $30,000. The welfare mothers who are not willing to pay the amount cannot be forced to do so due to the lack of the information and the benefits of the program. Thus, it can be concluded that the welfare mothers have the probability to be substantial over either $3,000 or less than $3,000.

a) The revenue of the municipality is Price × Quantity.
The revenue of the municipality when it charges no admission fee for the hockey arena is ($0 × 300) = $0. The area ADF is entirely obtained by the visitors.
The revenue of privately owned hockey arena that charges $5 for admission is, ($5 × 100) =$500. The area BCDE is the revenue collected by the privately owned hockey arena.

b) The demand curve indicates that the price and quantity are inversely related to each other, as price rises from zero the number of visitors falls. In future, the privately owned hockey arena will prefer to charge admission fee rather than no admission fee. This is because; with no admission fee, the number of visitors will be higher but the firm will earn no benefit from the hockey arena. If it charges some admission fee above the $0, it will gain revenue, i.e. gross benefit from the hockey arena. However, the benefits of the visitors will be decreased. Due to imposition of admission fee, the quantity that is the number of visitors will be reduced. If the price is too high, there will be no visitors and the gross benefit will be zero again (Eggert et al. 2014). Hence, the private hockey arena will charge a price, where it can maximize its gross benefit.

The obligation of the import tax will have the effect on the domestic oil market that is given as follows:
The quantity consumption and its change:
-1 = (Δ q / Δ p) (p/q)
Δ q = (-1) Δ p (q / p)
Δ q = (- 1) ($ 30) (6 billion) / ($ 90)
Δ q = – 2 billion.
Domestic supply and its change for oil:
 0.25 = (Δ q / Δ p) (p / q)
 Δ q = (0.25) Δ p (q / p)
 Δ q = (0.25) ($30) (3 billion) / ($90)
 Δ q = 0.25 billion.
The imposition of the import fee leads the domestic consumption to fall to 5.8 billion barrel per year. The domestic production will rise to 3.25 billion barrels per year. Imposition of import fees will lead the imports to fall to 2.55 billion barrels per year (5.8 billion – 3.25 billion).

The four simple methods that can be used to predict the impact of demand and supply curve when it is not available are given below:

a) On getting an idea about the equilibrium price and quantity of the object, the demand and supply of that object could be predicted from the equilibrium point of price and quantity. Example: Suppose that the demand and supply curve of rice for a country is unavailable. The equilibrium price and quantity of the rice of that country is determined (Baumeister and Peersman 2013). The demand and supply of rice is predicted from this equilibrium point.

b) On knowing the surplus and shortages of any object, the demand and supply of that object could be predicted.
Example: On considering the country Nigeria, there is shortage of food whereas the population is high. It can be predicted that the demand of food is high whereas there is a shortage of supply of food.

c) Seeing the impact of change in equilibrium of price and quantity, the demand and supply of the object could be predicted.
Example: Change in the price of oil globally helps to predict the demand and supply of oil in the world.

d) Knowing the circular flow model of the product gives an overview about the impact of the demand and supply.
Example: Circular flow model of sales of cars gives an idea about the impact of demand and supply of cars.

References

Baumeister, C. and Peersman, G., 2013. Time-varying effects of oil supply shocks on the US economy.American Economic Journal: Macroeconomics,5(4), pp.1-28.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.
Eggert, A., Hogreve, J., Ulaga, W. and Muenkhoff, E., 2014. Revenue and profit implications of industrial service strategies. Journal of Service Research, 17(1), pp.23-39.
Li, Y.Y., Chen, P.H., Chew, D.A.S., Teo, C.C. and Xu, Y.Q., 2013. Project Management Factors Affecting Green Building Projects: Case Study of Singapore. InApplied Mechanics and Materials (Vol. 357, pp. 2346-2352). Trans Tech Publications.
Mallick, N.C., 2014. Applications of Price Gap and Adjustment Weights in Analyzing a Natural Monopoly with a Linear Decreasing Marginal Cost Function. Available at SSRN 2431538.
Roosen, J., 2014. Cost-Benefit Analysis. In Risk-A Multidisciplinary Introduction (pp. 309-331). Springer International Publishing.