Essay Plans Theme 1

Question 1

Market failure
- indirect taxation

Answer 1

• increase costs of production and are passed to consumers

HOWEVER:
- price inelastic demand
- cause black markets
- regressive

Question 2

Market failure
- subsidy

Answer 2

• money grant to lower costs of production and encourage an increase in output.

HOWEVER:
- huge government cost (opportunity cost)
- firms may use subsidy in other ways
- gov lack information to set at right level

Question 3

Market failure
- regulation

Answer 3

• rules and laws set by gov that economic agents must follow to encourage changes in behaviour.

HOWEVER:
- regulation is costly (policing enforcement)
- cause black markets
- difficult to set the right level

Question 4

Market failure
- tradable pollution permits (regulation)

Answer 4

• gov sets pollution cap for year
• issue permits to firms adding to cap
• firms either invest in green technology or buy spare permits
• pollution decreases to social optimum

HOWEVER:
- some countries can’t afford enforcement
- gov imperfect info and may set too strict
- International cooperation is difficult

Question 5

Market failure
- state provision

Answer 5

• direct provision of goods and services free at the point of consumption.
• merit and public good
• (inelastic supply as fixed resources)

HOWEVER:
- always excess demand (waiting list, overcrowded class)
- expensive
- inefficiencies in state run organisations

Question 6

Market failure
- Price controls

Answer 6

Max price
HOWEVER:
- excess demand
- black markets
- difficult to set right price

Min price
HOWEVER:
- inelastic demand
- regressive
- difficult to know the right price

Question 7

Market failure
- information provision

Answer 7

• gov funded info provision, advertising, education to encourage or discourage consumption.

HOWVER:
- expensive
- no guarantee of success
- long run, not short run

Question 8

Free market

Answer 8

Benefits:
- allocative efficiency
- dynamic efficiency
- no risk of gov failure

Disadvantages:
- creative destruction
- price volatility
- markets can fail

Question 9

Specialisation

Answer 9

Benefits:
- higher output (trade, growth)
- allocative efficiency
- higher productivity and quality

Disadvanatges:
- finite resources
- changes in tastes