1.5.2 Government intervention and failure Flashcards
The polluter pay principle
Price of a product that pollutes should reflect both the private costs of production and external costs (social cost) → happens when external costs can be internalised and changing laws/regulations can cause this
Incentive
Any factor (financial or not) that enables or motivates a particular course of action, or is a reason for preferring one choice to the alternatives
what does gov intervention address
Government intervention addresses a number of market failures:
- Reducing the impact of external costs
- Ensuring that potentially under-produced products are available to all, as with healthcare and education
- Ensuring that over consumed goods (demerit goods) are discouraged or prevented
- Reducing the impact of anti-competitive business behaviour so prices are fair to the consumer
5 different strategies to oppose market failure
- Regulation → rules that apply to organisations. Gov, the EU and trade associations make rules that enforce standards across whole industries
- Legislation → passing new laws to restrict activities that create negative externalities and over consumption
- Indirect taxation → can increase the price of products that are over produced, making them more expensive to consume and reducing demand (sugar tax) → CONTRACTION
- Grants and subsidies → make under consumed products cheaper and encourage increased consumption (merit goods)
- Voluntary agreements → work well when there is a widespread agreement on the need for change
regulations
A particular type of legislation that defines the rights and obligations of individuals and organisations.
- Govs can use it to influence the extent to which negative externalities affect the quality of life in our society.
- Politics can influence what is regulated and by how much it is regulated
Usually for environmental standards and then monitor and control activity:
- May take the form of a quota or setting minimum standards for environmental emissions
- Regulatory bodies can inspect and prosecute businesses that fail to comply, but full monitoring can be costly to enforce and difficult
- The UK environment agency set out all the regulation that affect the environment in the UK
regulation for demerit and banned goods
For demerit goods
- Can see what the socially acceptable quantity demanded should be to internalise external costs,
- This informs the government on how to implement regulation
For banned goods
- At all levels social cost> social benefit
- The gov action would be to - completely ban (guns, drug)
There is no equilbrium reached
extending property rights
This is a way of internalising the externality → making the producer responsible for the spill-over costs
- consumers/individuals are given the right to sue firms for damages to cover spill-over costs, so the firm is forced to pay these costs by the courts
- Advantage: courts/experts resolve the settlement and the firm has to pay the spill-over costs/compensation
- Disadvantage: the damage is already done, and it focuses on rectification instead of prevention of the negative consequences; damages are often qualitative and are hard to measure
pollution permits
gov/eu sets the amount of acceptable pollution and grants each producer a permit to pollute
- Efficient firms can sell their permits to polluting firms
- The efficient firms gain revenue and profits, while the polluting firms face a loss due to the cost of the permit
- This provides an incentive for the polluting firms to become efficient by changing their behaviour in order to increase their profit/rev + gain competitive advantage IN THE LONG RUN
- No longer having to buy a permit and being seen as more socially responsible is profitable as they form a loyal customer base IN THE LONG RUN
- Advantage: the market generates the solution and firms have time to adapt and change int he LONG RUN
- Disadvantage: in the SHORT RUN, pollution levels do not actually change
legislation
New laws change individual and business behaviour, and failure to comply leads to a penalty
- The government decides to what extent externalities will be permitted and the appropriate penalty for non-compliance (drug trafficking is illegal and this is widespread in education)
Advantages
- Expected standards are clear
- Failure to comply has consequences
- The consequences are known
disadvantages
- The law may be difficult to enforce
- Enforcement can be expensive
- Penalties may not deter behaviour
indirect taxation
The gov can control some negative externalities by creating an incentive or disincentive that will change consumer or producer behaviour and reduce/elimnate some external costs
- Involves taxing over consumed products
- High indirect taxes on alchohol/tobacco etc raise their prices, discouraging consumption and reducing some of the negative externalities they produce (healthcare costs on the tax payer, affecting the quality of life)
imposition of a tax
(how has supply shifted, what is tax, it depends?)
The imposition of a tax shifts the supply curve vertically upwards by the amount of the tax.
- This tax reflects the external cost caused by the production of the good
- This is hard to measure due to qualitative features of external costs
- Price has increased from P1 to P2 and quantity demanded has fallen → contraction of demand
BUT the impact of higher prices on consumption will depend on its PRICE ELASTICITY OF DEMAND (inelastic = not that much of an effect)
inelastic demand and tax
- If ped = inelastic, Usually due to habit and addiction, so people will not change their habits
- Need a good to be elastic for people to stop using
elastic demand and tax
- Even if consumption decreases by a small bit the gov uses revenue from the tax to invest in healthcare, education, schemes to stop the demerit good being used (eg anti smoking)
- This helps decrease consumption in another way, decrease addiction and make the good more ELASTIC
- Demand curves are more ELASTIC at the beginning, and more INELASTIC at the bottom
road pricing and hypothecation
- Advantage: A market solution is reached
- Disadvantage: everyone has to pay the same charge, regardless of their income
- The supply of roads is fixed → perfectly inelastic
-The road is priced 0 - For roads qd>qs, there is no equilibrium and excess demand → congestion
- When an equilibrium is reached, the price can be determined as a congestion charge, to reduce road usage
- It is designed to increase the price and make demand contract so there can be reasonable road use (£15 in london)
Road pricing is a form of HYPOTHECATION → creating a tax for one purpose and using it for another set purpose
- Congestion charge can be put towards funding for public transport (new buses are easy to create than trains etc) to further reduce road use
grants and subsidies
- Subsidies can increase the consumption of under consumed goods (merit goods)
- The gov tries to subsidise goods like solar panels, wind turbines and home insulation to make them cheaper and encourage consumer to buy them more
- This reduces demand for non renewable energy, which carries negative externalities
- Grants may be provided to help pay for activities that improve the quality of life (leisure centres)
