2.8.4 - External Benefit Policies

Question 1

List the 4 policies to manage external benefits

Answer 1

• Subsidies
• Stae provision
• Regulation
• Increasing demand

Question 2

Pros and cons of subsidies

Answer 2

Pros:
- Creates direct financial incentive that will increase output
- Low income consumers benefit
- Increase in employment due to increase in output

Cons:
- opportunity cost
- may lead to welfare loss as inefficient producers enter market

Question 3

Pros and cons of state provision

Answer 3

Pros:
- Most direct way of increasing output towards socially optimum level
- State more likely to make decision in public interest
- can be provided so that all households can afford

Cons:
- Cost is a significant opportunity cost
- Less efficient due to diseconomies of scale
- Subject to political interferance

Question 4

Pros and cons of regulation

Answer 4

Pros:
- forces individuals and businesses to achieve socially efficient level
- can be targeted precisely at goods and services

Cons:
- costs of policies and enforcing
- adds to business costs
- Some businesses and individuals avoid regulations

Question 5

Pros and cons of increasing demand

Answer 5

Pros:
- Not as expensive as subsidies and not as hard to manage as regulation
- Effective long term

Cons:
- Opportunity cost to the government
- Can’t measure effectiveness of advertising and educational programs