Barriers to Efficiency

There are barriers that cause underproduction and over production when it comes to efficiency. These barriers include price and quantity policies, taxes and subsidies, externalities, public goods and common resources, monopoly and high transaction costs.

Price policies can deter price changes that set equilibrium for quantity demanded and quantity supplied. Take for example rent prices for apartments. There is a limit on the maximum amount that landlords can charge their renters. Quantity policies are able to set a maximum value on the amount of goods that can be produced which can lead to underproduction. The government can set up a limit on the amount of crop farmers can produce, which can result in underproduction.

Taxes raise the prices paid by consumers or buyers and decrease the prices obtained by sellers. This leads to a decrease in the quantity produced and results in underproduction. Subsidies are imbursements to producers given by the government. This decreases prices paid by consumers or buyers and increases the prices obtained by sellers.

An externality is a cost or gain that affects another person, but not the seller of that buyer of a good or service. It can result in overproduction if there is external cost, for instance burning coal to produce electricity causes acid rain and can spoil crop. The plant that is producing air pollution by burning coal does not consider the cost of the pollution, and creates overproduction. An external benefit can occur if an apartment owner chose to install a smoke detector, this would beneficial to her neighbor as well. But she does not consider her neighbor’s benefit, and chooses to not install a smoke detector. This leads to underproduction.

Public goods are benefits that everyone experiences and nobody can be rejected from these benefits. Public goods can lead to underproduction. Uncongested non-toll roads are an example of public goods. Common resources are not owned by anyone and are used by everyone. For instance, air is a common resource; everyone is able to breathe air and cannot be excluded from using it.

A monopoly is a company or business that is the only supplier or a good or service. Cable television is supplied by companies that are monopolies. Maximization of profit is the self-interest of a monopoly. Since monopolies don’t have competitions, they are able to set their own price. Monopolies can lead to underproduction because they don’t produce enough and charge a high price.

High transaction costs is the opportunity costs of creating or performing trades in a market. The stores in a shopping mall are markets that utilize large quantities of limited labor and capital supply. The opportunity cost must be worth tolerating for founding or launching a market. If transaction costs are too high, than it may lead to underproduction in the market.