Economi Analysis

In: Business and Management

Submitted By wafoyo
Words 525
Pages 3

The Keynesian economics theory explains that in the short run and especially during a period of recession, the economic output of a nation is greatly influenced by the aggregate demand. It argues that private sector creates inefficiency in the market and need the intervention of the government through fiscal and monetary policy. Classical economics on the other side explain that the government should not be involved in the market. The proponents say that the market creates its own equilibrium. They advocate for a supply side economics where supply creates enough wealth to sustain demand. The economy today needs more demand. The government should provide a stimulus through Keynesian’s fiscal policy. It can do so subsidizing car manufacturing to encourage more car production and sales. As explained by Mayer the stimulus would increase demand for gas and save the jobs lost by the petroleum companies that are making loses.
Externalities are all costs paid and benefits enjoyed by a person without that person choosing to incur them (Mayer, 2010). Externalities are grouped into positive and negative externalities. An example of a positive externality is when an investor constructs an apartment building next to another person’s shop. The shop owner receives more customers. An example of a negative externality is when one gets cancer for living with a smoker. Neighbor loudly playing a stereo is exemplifies negative externality as I get to incur noise pollution costs that I did not choose to have.
Market failure occurs due to inefficient allocation of resources (Mayer, 2010). As a result the price fail to account for all the benefits and costs incurred. The solution for externalities is imposing a tax on the negative ones and a subsidy to the positive ones. Private property rights asses the ability of a person to acquire private property…...

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