Laser Printer and Government Intervention Case Study

Laser Printer and Government Intervention - Case Study Example In other words, this is represented by the area a+b+c+d. On the other hand, the producer’s surplus is represented by the variation between the marginal cost of production and the revenue earned (P1). This is the area f+g+h. The producer surplus corresponds to the profits minus the fixed cost. However, production of Q results into externality effects such as lack of market for the home produced cartridges. This is represented by the Marginal External Cost (MEC). Considering that such costs do not change, then it means that the entire cost to the society regarding the production of Q is the marginal society curve, as represented by MSC = MPC + MEC. Q1, which is an external cost, corresponds to the area: c + d + e + f + g + h. The intervention of the Kuwait government through the imposition of tax on the imported cartridges is aimed at internalizing the externality, which is arrived at after taking consideration the external cost of production (Barthold 133). If the government imposes a constant importation tax on every unit of cartridge imported so that this raises the cost of production, which corresponds to the MSC curve, then it means that the new market will be represented by P2 and Q2. Lower quantity and a higher price will occur as a result of the government regulation. Area (a) is the consumer surplus at the new equilibrium and (h) is the producer surplus. Area b + c + f represent the government tax collection. The tax’s deadweight loss (DWL) is represented by d+g. Nonetheless, b + c + f, is the external cost, which is avoided. This means that the net benefit from the government intervention is d + e + g - d - g = e > 0, which is: MEC-DWL. To find out whether the imposed tax is really efficient, then a benefit-cost analysis should be conducted. Assuming that the producers are supposed to pay extra tax, their surplus will be represented by the area (b), in which case area c + f + h is the elevated production costs resultingà ‚  from the government intervention. As the output decreases from Q1 to Q2, some jobs are lost, though more jobs are gained when the home industries employ more people (Barthold 135).