A2.04.08: Legislation, Regulation and Education

Question 1

Define direct government provision

Answer 1

Direct provision by the government free at the point of consumption

Question 2

Explain state provision solving market failure of underconsumption and production merit goods (healthcare and education specifically)

Answer 2

• state provision ensures increased access, hence equity, of these merit goods as they are sold free/ below costs therefore increasing consumption
• State provision can be used as a viable policy to solve that market failure as it can be argued that nobody should be excluded from accessing healthcare or education

Question 3

Explain state provision solving market failure of missing markets given the free rider problem (public goods)

Answer 3

• Governments consider the full social costa and and benefits thus, all the externalities present allowing them to allocate resources at the socially optimum level of output
• There is universal access as it is free at point of consumption
• Allocative efficiency and welfare maximisation
• Solves underconsumption and production as well as inequity issues

Question 4

State and explain 3 disadvantages of direct government provision

Answer 4

• Shortage/excess demand: Governments ration the shortage by (in the healthcare market for example) comparing the severity of conditions; this has problems as it is normative thus, there are many individuals that live in pain as their condition is not considered serious enough to obtain immediate attention
• Expensive; long-run funding may result in higher taxes, tax cuts to other areas of govt spending in the economy and general opportunity costs
• There is imperfect information in actuality; quantity could be higher (overproduction) or lower (worsening the shortage/excess demand)

Question 5

Define regulations

Answer 5

• Rules enacted by governments that must be flowed by economic agents to encourage a change in behaviour. They have a non-market based approach hence, there is no dependence on the PED

Question 6

State the command-control approach of regulations

Answer 6

Command:
- Bans
- Caps
- Limits
- Innovative regulations (schemes)

Control:
- Enforcement (otherwise there is no incentive)
- Punishment (fines, banned from consumption, jail etc)

Question 7

3 Advantages of regulations

Answer 7

• There is incentive to change behaviour (to consume/produce more/less)
• It may solve issues int eh free market by moving the quantity to the socially optimum level without working through the free market
• Allocative efficiency and welfare gets maximised

Question 8

5 Disadvantages of regulations

Answer 8

• Costs (enforcement costs; administrative costs, policing costs to ensure people abide by them)
• Setting the right level of strictness of regulation
• Unintended consequences; Too strict for producers, reducing profitability, shutting down, firms try cheat the regulation. Too strict for consumers; smuggle, loss of tax revenue, more policing, greater costs to govt.
• Equity; pollution caps may be too difficult for some firms as throughout history, they have developed fossils-fuel-dependent production therefore, it is unfair to them. Tradable pollution permit scheme would be more appropriate as firms would have a choice
• Paternalistic nature; there is a lack of liberty as regulations are very forceful; may take away benefits of the market especially if the market failure is not that significant for the use of regulations