Taxes on negative externalities are intended to make consumers / producers pay the full social cost of the good. This reduces consumption and creates a more socially efficient outcome. If a good has a negative externality, without a tax, there will be over-consumption (Q1 where D=S) ...
Tejvan Pettinger Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as...
Explanation of why government intervention to try and correct market failure may result in government failure. Summary Market failure is a socially inefficient allocation of resources in a free market. Market failure can occur for various reasons ExternalitiesDemerit/merit goodsPublic goodsMonopoly power Government failure occurs when government intervention results in a more inefficient...
Prabhat Patnaik The post-second world war years had seen systematic intervention by the State to stabilize capitalist economies. In fact State intervention had played the same role in that period that incursions into colonial and semi-colonial markets had played earlier, over much of the nineteenth century,...
Price elasticity of demand (PED) measures the responsiveness of demand after a change in price. Example of PED If price increases by 10% and demand for CDs fell by 20%Then PED = -20/10 = -2.0 If the price of petrol increased from 130p to 140p and demand fell from...
Interest rates are constantly in the news, and we all know they have an important effect on the economy and our personal finances; but, the bewildering array of interest rates can become confusing. This is hopefully a simplified guide to how interest rates affect the...
Tejvan Pettinger The US has recently placed tariffs on Chinese imports and is threatening to further increase tariffs in the next few weeks. The effect of these tariffs is to increase domestic prices, provide some benefits to domestic producers, but also cause costs to US exporters....
Tejvan Pettinger Readers Question: Does inflation causes unemployment? There are a few different scenarios where inflation can cause unemployment. However, there is not a direct link. Often we will notice a trade-off between inflation and unemployment – e.g. in a period of strong economic growth and falling...
C. P. Chandrasekhar and Jayati Ghosh Just before the Global Financial Crisis more than a decade ago, China had emerged as the most significant trading partner for a majority of the world’s economies. Since then, it has had even more significant impacts on global exports and...
Tejvan Pettinger Household saving is defined as income that is not consumed. Savings can be kept in cash form, saved in a bank account or saved in long-term assets, such as government bonds. Quick summary of factors that influence saving levels Interest rates – higher interest rates makes...