Elastic and Inelastic Demand

1 January 2017

The demand for newspaper is inelastic while the supply for newspaper is elastic in the short run. This means the quantity demanded for newspaper does not respond strongly to price changes but the quantity supplied for newspaper is responsive to price changes in the short run. (Mankiw, 2009) The demand is inelastic because newspaper has very few substitutes. Although online news is getting popular nowadays, the majority still prefer to read the papers. Besides, newspaper is a necessity which people read every day to know what happens around the world.

Newspaper has a broadly defined market and it has no good substitutes. (Mankiw, 2009) The supply of newspaper is elastic because firms that produce manufactured goods such as newspapers can run their factories longer in response to a higher price. (Mankiw, 2009) From the graph, we can derive the table below: Without TaxWith TaxChange Consumer SurplusA+B+CA- (B+C) Producer SurplusD+E+FF- (D+E) Government Revenue -B+D+ (B+D) Total SurplusA+B+C+D+E+FA+B+D+F- (C+E) Consumer surplus decreases by the area B and C while producer surplus decreases by the area D and E after a tax is imposed.

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Both tax levied on sellers and tax levied on buyers place a same size of wedge between the price that buyers pay and the price that sellers receive (Mankiw, 2009). Regardless of how the tax is levied, buyers and sellers share the tax burden (Mankiw, 2009). Buyers pay more and sellers receive less. Meanwhile the government revenue from collecting taxes increases by the area B and D. As a result, total surplus decreases by the area C and E causing a deadweight loss.

Tax has made both consumers and producers worse off and it decreases the overall welfare of society. The equilibrium quantity falls after a tax is imposed causing the market of newspaper to shrink. (300 words) Task 2 Negative consumption and production externalities are considered harmful to society. A negative externality is the adverse and uncompensated impact of one person’s actions on the wellbeing of a bystander. (Mankiw, 2009)

Negative consumption externalities cause a difference between private benefit and social benefit (Tutor2u, n. d. as social benefit takes into account of both the private benefit and the adverse impact of one person’s actions on the wellbeing of society. When the marginal private benefit > marginal social benefit, a negative consumption externality exists (Tutor2u, n. d. ). The intersection of the marginal-private-cost curve and the marginal-social-benefit curve determines the optimal output level. From the diagram, we can know that it is less than the market equilibrium quantity. This shows that the good is over-consumed. There will be a deadweight loss of economic welfare.

Negative production externalities cause a difference between private cost and social cost because social cost takes into account of both the private cost and the external cost. When the marginal social cost > marginal private cost, a negative production externality exists (Tutor2u, n. d. ). This means that the cost to society of producing one good is larger than the cost to the producers (Tutor2u, n. d. ). The optimal output level is determined by the intersection of the marginal-private-benefit curve and the marginal-social-cost curve.

It is also less than the market equilibrium quantity according to the diagram above. Again there will be a deadweight loss. Because both the negative consumption and production externalities lead markets to produce a larger quantity than is socially desirable, the markets are inefficient. Thus market failures happen as markets fail to maximize total surplus, causing deadweight losses. Therefore negative consumption and production externalities are considered harmful to society. (Mankiw, 2009) The production of rare earth will cause negative production externality to society.

This is because the refinery of rare earth ore will generate radioactive waste which is seriously harmful to human beings. Recent protests in Kuantan to stop Malaysian government from letting Lynax, a giant Australian Mining Company to build the world’s largest refinery for rare earth metal in Gebeng and Tun Dr Mahathir Mohamad’s recent comments about the radioactive waste in Perak have made Malaysians recall back the incident of Bukit Merah during 1980s (Mariam Mokhtar, 2011). In 1982, Asian Rare Earth (ARE) which is a subsidiary of Mitsubishi Chemical began operating its rare earth plant in Bukit Merah.

ARE extracted yytrium (a rare earth) from monazite, one of the minerals found in amang for use in high technology products. Both monazite and the waste contain thorium hydroxide, which has a half-life of 13. 9 billion years. Cancer-causing radon gas is released during decay of thorium. (Mariam Mokhtar, 2011) Because of the radioactive waste, the residents of Bukit Merah suffered very serious harmful effects. Not only there is a high incidence of cancer rate, the residents suffer birth defects and leukemia.

Jayabalan, a general practitioner physician and toxicologist who treated the leukemia victims, carried out a survey and proved that the number of miscarriages in the village was higher than the national average (Mariam Mokhtar, 2011). A sample test on 60 children had found that their bloodstreams contain high levels of lead (Mariam Mokhtar, 2011). According to New York Times, Lai Kwan, the former workers of ARE, has spent the last 29 years taking care of her son from her pregnancy while working in ARE’s refinery, who was born with severe mental and physical disabilities (Bradsher, 2011).

The harmful effects of radioactive waste are long term. Parents of those children who were born with birth defects and leukemia have to take care of their children for the whole life time. The victims of Bukit Merah incident still suffers today. After a long-drawn battle and petition of the residents against ARE, Japanese environmentalists and politicians stepped in and persuade ARE to close the refinery in 1992. Mitsubishi Chemical agreed to fix the problem and subsequently spend $100 million to clean up the site.

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