Use the equimarginal principle to explain consumer equilibrium. The loss in utlity from consuming less of good 2 is more than offset by the gain in utility from consuming more of good 1. This reallocation increases MU 2 and decreases MU 1 . The reallocation continues until the equimarginal principle is satisfied. Briefly explain each of these sources of inefficiency.
Politicians respond to the special interests as it is in their interests.
Politicians need the support to get re-elected. The majority does not get involved since they are barely impacted. The Short-Sightedness Effect Voters tend to ingore costs and benefits that occur in the future. A program than entails large current costs with larger future benefits will not be adopted because of the current costs. A program than entails large future costs and small currnet benefits will pass since the future costs will be ignored.