Essay Writing Flashcards
Disadvantages of indirect taxation
- There are problems determining the exact amount of tax,since it is difficult to estimate the cost of the negative externality. Too small a tax means nothing will change,too large a tax could create a black market.
- The burden of the tax is shared with the consumer meaning that the producer may not cut production as much as he should. This means that resources are still not being allocated efficiently; negative externalities still exist.
- The problem with most demerit goods is that they are price inelastic. Although the tax will increase the price of the product, consumption may not be reduced as much as intended. This will still lead to high levels of negative externalities.
However,taxation could work if the money gained was used to provide alternative measures that could reduce negative externalities such as information provision.
Advantages of indirect taxation
- By imposing a tax, the price of the product is increased, thus reducing demand. An advantage as it reduces consumption of a demerit good.
- Tax is placed on the production process,increasing production costs and reducing the amount that can be supplied. Advantage as it reduces production,thus reducing negative externalities.
- By making the producer pay for the negative externality,the tax is focussing on the people responsible for the over-using of resources. Fair use of taxation is known as “polluters pay principle”
Taxation is seen as a positive way of reducing negative externalities and moving closer to equilibrium.
Advantages of subsidies
- By introducing a subsidy,the price of the product is decreased,thus increasing demand and supply. An advantage; it increases the consumption of a merit good.
- The subsidy is placed on the production process. This decreases production costs and increased the amount that can be supplied. An advantage;if increases production, leading to a rise in consumption, thus reducing positive externalities.
- By choosing products carefully,such as making prescriptions cheaper,it means that there will be a greater uptake which will have a positive effect on the whole economy, leading to a positive impact on worker’s health and therefore,a decrease in the funds the NHS needs.
Although subsidies are paid for by the Government, if they are used carefully,the savings they make can pay for the subsidy itself, opportunity cost and PPF.
Disadvantages of Subsidies
- There are problems determining the exact amount of the subsidy,since it is difficult to estimate the cost of the positive externality. Too small a subsidy means that nothing will change,too large a subsidy could mean money is wasted.
- It is also difficult to establish what should be subsidised. If broccoli is subsidised,although there will be an increase in demand in this product,it will have a negative impact on substitute goods such as cabbage.
- Another problem is the price elasticity demand of the product; the merit good has to be price elastic for there to be a worthwhile change in consumption levels,otherwise it will be a waste of funding.
Although subsidies could work,it would be better if it was used in conjunction with alternative measures that reduce positive externalities,such as information provision.
Advantages of regulation
- By introducing a regulation, the price of the product is increased,thus decreasing supply and demand. An advantage; it decreases consumption of a demerit good.
- The regulation impacts on the production process. This increases production costs and decreases the amount that can be supplied. An advantage; it decreases production,leading to a fall in consumption, thus reducing negative externalities.
- By introducing legislation the Government can restrict certain sections of society from accessing demerit goods. This makes the system more flexible and has the added bonus of being immediately effective.
Regulations are designed to set standards in order to ensure the correct limits are placed on economic behaviour and equilibrium Is achieved,
Disadvantages of regulation
- The main problem is nature of the legislation to be used. If the government decides to fine a polluter,the issue is how much to fine them. If the cost of the fine is less than buying greener technology, there is no incentive to reduce negative externalities.
- Banning a product can just create a black market and could actually make the product more desirable. It means that large sums of money need to be spent policing the ban and just increases criminality amongst its users.
- A further problem caused by prohibition is that the black market means that unregulated products are now available. This could cause health problems to the users which would increase overall costs to the government.
Although regulation could work, it would be better if it was used in conjunction with information provision.
Advantages of a tradable permit
- It makes the polluter directly responsible for the pollution that his processes emit into the atmosphere. This is a very equitable remedy and encourages firms to cut back on their pollution as much as possible; polluters pay principle.
- It allows the company to plan technological improvements to their processes in order to work towards a reduction in carbon emissions. If a company was charged with £50,000 a year for their permits and improvements in capital would cost £150,000- charges be effective in 3 years.
- If a company buys permits and finds it doesn’t need them, e.g. Investing into green technology, they can sell them to other firms. This is ; these pollution permits are used in the same form as carbon credits.
Permits are designed to set standards in order to ensure the correct limits are placed on economic behaviour and acceptable levels of pollution are achieved.
Disadvantages of tradable permits
- Rich companies can buy permits and continue to pollute at the same levels. This will raise money for the government which could be used to fund health issues,such ad prescriptions for asthma inhalers,but the third party still suffers adverse effects.
- It’s also difficult to place a price on each permit and to establish how many are actually needed in the first place;too many will lead to a decrease in value as over supply leads to a fall in price as the market is saturated.
- Countries who pollute more than their quotas can simply buy permits off other countries. Therefore rich developed countries have been buying permits off less developed countries. This has not reduced pollutions worldwide and pollution particles can carry across countries on the wind.
Although permits could work,it would be better if it was used in conjunction with alternative measures which could reduce negative externalities such as information provision.
Advantages of information provision
- It is an effective way of solving market failure caused by negative externalities because it would give the full facts of an activity to the consumer and allow them to make an informal decision. A simple solution would be labels on ready meals to show the damage such products cause- cheaper and large scale.
- It can be used to educate people and change attitudes towards an activity. Smoking can be used in this example. By providing school children with information on the dangers of smoking, both to the consumer and the third party, the number of smokers in the UK is gradually falling.
- Another method is launching a campaign such as drink driving at Christmas, by bombarding the consumer with lots of different types of information,they become more aware of the issues associated with the activity and thus reduce consumption.
The main issue with information provision is that they tend to be long term proposals and so other methods are needed in short term.
Disadvantages of information provision
- Infomercials can be very hard-hitting and dramatic in order to attract and maintain focus and this level of intervention is not permitted on UK television. This means that such a method has limited effect on people’s tastes and attitudes and that external costs remained unaffected.
- Campaigns,however are an expensive process and once the information is removed,the consumption increases again. This means that the amount of external costs return to their previous level.
- A further problem is that even if people are given the correct information on how to regulate their behaviour,it doesn’t necessarily mean that they will stop consuming demerit goods. This means that the cost of providing information is being wasted.
Although information provision could work, it is a long term policy; it would therefore be better if it was used in conjunction with alternative measures which reduce negative externalities such as taxation.
