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The Economics Behind Cost and Benefit Analysis

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Nonetheless, as shown in the above graph, any kind of government intervention in the market would surely reduce the level of consumer and producers surplus in the industry. For example, if the government increases the incidence of taxation on sellers (as shown in the above graph), then it would surely reduce the overall supply of the concerned product. Lower supply in the market would increase the price of the actual product (as the sellers will transfer a part of the burden on consumers) and finally, will reduce the consumer surplus in the market (Grover and Malhotra, 2003).   However, the scopes of commercial activities between firms in the modern days have turned out to be highly complex in nature.

Competitive forces in the industry are often offset by the monopolistic authorities that exist due to the survival of concentrated market powers in a firm. Such condition generates information asymmetry in the market. This gives rise to positive or negative externalities. Positive externalities are good, but the existence of negative externalities is bad for the economy. During negative externalities, the social marginal cost of a firm is always more than the private marginal cost.     Similarly, the huge fund required to be invested in the HS2 project would augment the burden of taxation on the taxpayers of Britain, thereby reducing the overall consumer and producer surplus in this industry.   Under such conditions, the government must intervene in the market to reduce the external cost. The main reasons for which the government intervenes in the market are: • For rectifying market failures. • Redistributing income and wealth for achieving equitability.   • Enhancing the overall performance.   The HS1 project seems to lack adequate advantages; hence, the overall social cost of the project is estimated to be more than its economic cost.

The lack of the HS1 project seeks requirement for the HS2 project.   Unlike the case of a private good, for a public good: • Market equilibrium price is not the best price.   • Consumers deny paying for improvements or constructions of such product.

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