4.3.3 policies to deal with market failure

Question 1

What can governments use to correct market failure? [6]

Answer 1

• Indirect taxes
• Subsidies
• Tradeable pollution permits
• State provision of public goods
• Provision of information
• Regulation

Question 2

How do subsidies encourage the consumption of merit goods?

Answer 2

It is a payment from the government to a producer to lower their costs of production and encourage them to produce more.

Question 3

What are tradeable pollution permits?

Answer 3

This is a limit on carbon emissions for firms, which can then be traded between one another. A firm who can produce at a low emission can sell their excess permits.

Question 4

What are the advantages of tradeable pollution permits? [3]

Answer 4

• Should benefit the environment in the long run by encouraging green production methods
• Government could raise revenue from permits as they can sell them to firms
• If firms exceed their permit they have to purchase from other firms, which may give an incentive to invest in green production methods

Question 5

What are the disadvantages of tradeable pollution permits? [4]

Answer 5

• Could lead to some firms relocating to where they can pollute without limits
• Firms might pass the higher costs of production onto the consumer
• Competition could be restricted in the market as permits create a barrier to entry
• Could be expensive for governments to monitor emissions