Advanced Economic Analysis (Economic efficiency) Essay

locomote Economic Analysis (Economic efficiency) - Essay ExampleEfficiency of exchange requires that all(a) allocations lie on the entreat curve such that the marginal rate of switching between each pair of goods (x and y) is identical for all consumers. Recall that each consumer maximises utility by attaining the point of tangency between the indifference curve and the work out line for goods x and y.Efficiency in production requires that each buzz offrs Marginal gait of Technical Transformation between capital and labour is identical in the production of all goods and is achieved analogously to the efficiency of exchange. The requirement is that the Marginal rates of duty period between any two pairs of inputs be the comparable for all producers. This is ensured through profit maximization which ascertains equality between the MRTS and input determine ratio.Efficiency in the Output market requires that the output mix be chosen such that the marginal rate of transformation between any two pair of goods is equal to every consumers marginal rate of substitution for the two goods. ... assuming that in the market for sugar initially the scathe and quantity are at their equilibrium or market clearing levels P* and Q* as shown in the diagram to a lower place (figure 1). forecast 1 The market clearing price and quantity of sugar There are two cases that gather up to be looked at 1) the government intends to determine the price above P* and 2) the government intends to restrict the price infra P*. Consider the first case. At any price above P*, in that respect leave behind be free supply and this excess supply will exert a down pressure on the price to move back to the market clearing level P*. hypothecate the government wants to restrict the price at PP*. The government has two main options. First, it can visit a regulation or a price control that does not allow producers to charge below P. Alternatively it can buy off the necessary excess supply s o that the price settles at P. This is shown in the diagram below (figure 2). Figure 2 The government buys off the excess supply at price P so that it now becomes the market clearing price Essentially, the government creates supernumerary demand to sweep up the excess supply and thereby mitigates the downward pressure on prices. asunder from this, the options available to the government are those of putting a quota on the sugar producers and/or providing them monetary incentives to produce within the quota. Now, consider case 2) where the government intends to restrict the price at a level below P*. There will be excess demand at this price and thus prices will tend to rise upward. The first option the government has is to legally forbid producers from charging more. Suppose the government wants to restrict the price at a maximum of P. It can either legally prohibit high prices. Or as an alternative, if it has access to