Environmental Problems, Their Causes, and Sustainability 1

price matches what buyers are willing to pay for thesame quantity and a sale is made. In Figure 26-2 it isthe point at which the supply and demand curves intersect.In a pure free market economy such competitionbetween willing sellers and buyers is said to bringabout the greatest efficiency of resource use. Profit orloss is the difference between the cost of producingsomething and the price buyers are willing to pay.Changes in supply and demand can shift one orboth curves back and forth, and thus change the equilibriumprice. For example, when supply is increased(shifting the blue curve to the right) and demand remainsthe same the equilibrium price will go down.Similarly, when demand is increased (shifting the orangecurve to the right) and supply remains the same,the equilibrium price will increase. Try moving thecurves in Figure 26-2 in different ways that representchanges in supply and demand, and notice how theequilibrium price changes.Two related economic concepts are those of marginalcosts and marginal benefits. In economics, anythingdescribed as marginal usually refers to an increase insome measurement involving a certain number ofunits of a good or service and that number of unitsplus one. Marginal cost is the increase in total cost resultingfrom producing one more unit of a good or service.For example, a supplier (seller) might ask “Howmuch would it cost and how much profit might I makeif I produce one more unit of my product? Look at Figure26-2 again, and note that if you start at any pointon the quantity axis and move to the right, the supplycurve takes you up on the price axis. The difference betweena seller’s starting price and the new price representsthe seller’s marginal cost—the cost of producingthat one more unit. The seller’s marginal benefit is theprofit made by producing and selling one more unit.Similarly, when a seller produces one more unit ofaproduct or service, the increase in the benefit that itprovides to a buyer is the marginal benefit. For example,as a buyer you might ask how much would I benefitif I buy one more shirt? You can think of marginal benefitof buying a new shirt as the difference between thebenefit you gain from having ten shirts and the benefityou enjoyed from having nine. In this case, the shirtmaker’smarginal cost is the difference between the costof producing 1000 shirts and the cost of producing 1001.And your marginal cost is what it costs you to buy onemore shirt. A sale occurs if both the seller and buyerfind the marginal costs and benefits advantageous. Inreal world economics, marginal costs and benefits arewhat actually determine prices and benefits to consumersand costs and profits to producers.In fact, the market economic systems found in thereal world do not meet the theoretical conditions describedabove. In practice truly free markets do not exist.Businesses strive to drive their competitors out ofbusiness and exert as much control as possible over theprices of the goods and services they provide. Companieslobby for government subsidies, tax breaks, or regulationsthat give their products a market advantageover their competitors. Some companies also try towithhold information from consumers about dangersposed by products unless the government requiresthem to provide such information.Also, there are exceptions to the free market theoryof supply and demand. Some consumers may buy agood or service regardless of its price. For example,raising the price of gasoline or cigarettes may not significantlyreduce consumer demand because some buyersfeel they have to have these products. Economists callthis price inelasticity.Why Have Governments Intervenedin Market Economic Systems? Making Upfor Market DeficienciesGovernments intervene in market systems to helpprovide economic stability, national security, andpublic services such as education, crime protection,and environmental protection.Markets often work well in guiding the production ofprivate goods, but experience shows that they cannot berelied upon to provide the adequate levels of public servicessuch as national security and environmental protection.Thus governments intervene in market systemsto help correct market failures. For example, a singleseller or buyer (monopoly) or a single group of sellersor buyers (oligopoly) might come to dominate the marketand thus control supply or demand and price for agood or service. Governments can prevent this andother market failures through laws and regulations.Governments can also promote economic stability bytrying to control boom-and-bust cycles that occur inmarket systems.Other reasons for government interventions are to■ Provide public services such as national securityand education■ Provide an economic safety net for people who becauseof health, age, and other factors cannot meettheir basic needs■ Protect people from fraud, trespass, theft, and bodilyharm■ Establish and enforce civil rights and propertyrights■ Protect the health and safety of workers andconsumers■ Prevent or reduce pollution and depletion of naturalresourceshttp://biology.brookscole.com/miller14585