Correction Of Market Failure Flashcards
Disadvantages of indirect taxes (6)
1) difficult to quantify cost and place monetary value - social optimum position may not be achieved
2) increase cots of production to firms , making them less competitive compared to other countries
3) firms may relocate to other countries
4) demand for good may be price inelastic and so overall reduction of social costs will be small
5) tax revenue may not actually be used to compensate for the costs
6) might encourage development of illegal markets
Advantages of indirect taxes to correct market failure (4)
1) based in principle that polluters pay- both producer & consumer
2) work with market forces , helping to internalise external costs while maintaining consumer choice
3) level of pollution ( cost) should fall as output is reduced
4) tax funds raised can be used to compensate for the costs
Advantages of subsidies applied to renewable energy markets (4)
1) reduce air pollution
2) use of renewable energy resources helps to promote shis gained economic growth
3) rate of consumption of non renewable resources reduced
4) subsidies work with the market - help to internalise external benefits from renewable forms of energy
Disadvantages of subsidies applied to renewable energy (3)
1) opportunity cost to gov subsidies - may lead to cuts elsewhere or higher taxes
2) firms may become inefficient in production of they rely upon subsidies
3) may be less reliable
Buffer stock schemes
Agency setting a maximum and minimum price for a commodity and then intervening to ensure that price remains within this band despite sudden changes in supply/ demand
Advantages & disadvantages of buffer stock schemes
1) reduce commodity price fluctuations helping to stabilise producer incomes
2) greater certainty in market , leading to more investment
3) helps to ensure provision of commodities to consumers even in years of poor harvests
1) series of good harvests may put too much pressure on agency
2) long run trend of increased productivity in agricultural sector creates continuous pressure on agency to purchase additional stocks and requires downwards adjustment of Helen intervention price range
3) significant costs associated with storage & security of stockpiles - large buildings required
4) stocks may be perishable over long period of time
5) series of poor harvest may lead to agency running out of stocks to release to the market , this means the market price exceeds the maximum price and so the hg buffer stick system breaks down
Advantages of minimum price
1) reduction in commodity price fluctuations makes it easier for consumers to budget their spending
2) farm incomes are stabilised & increased leading to greater investment
3) employment in countryside maintained , helping to reduce rural- urban inequality
4) supply of agricultural commodities guaranteed even in times of poor harvest due to stockpiles
5) agricultural surpluses can be used as foreign aid
Disadvantages of minimum price (7)
1) price of food increases which could lead to hardship for consumers on low incomes
2) gov spending on agricultural surpluses involves opportunity cost - may have to raise tax or make cuts
3) increased storage & security costs for food surpluses
4) agricultural surpluses may be sold in overseas markets at very low prices - could damage farmers in developing countries who are unable to complete against cheap gov owned food
5) agricultural surpluses may have to be destroyed due to Perishability
6) excess supply represents inefficient allocation of resources
7) farmers are guaranteed an income which could cause them to become less efficient over time
Government failure
Occurs if government intervention leads to net welfare loss
High tax on tobacco , alcohol & waste as an example of gov failure
Encouraged illegal smuggling through organised crime
Gov lost significant tax revenue through this
Waste: adversely affects large families & low income households
Could lead to increase in fly tipping
Subsidies to bus transport as an example of gov failure
Inferior good
Waste of money
Road pricing as an example of gov failure
Road congestion scheme will help reduce external costs such as traffic congestion and air pollution
However if charge is set too high it could lead to an under utilisation of road space
May be unfair to low income motorists who cannot afford it
May reduce trade for business within congestion charge zone
Socially optimum quantity of traffic may not be achieved
Buffer stocks & minimum prices as an example of gov failure
Often lead to huge food surpluses which have to be destroyed or dumped in markets of developing countries
NMW as an example of gov failure
An NMW set above free market wage may lead to unemployment in certain labour markets
Allocation of fish quotas as an example of gov failure
Environmentalists think quotas are too high
Fishing boats throw dead fish back into sea
