Exam Revision Unit 1

Question 1

Determinants of PES

Answer 1

1. Time
2. Availability of stock (to release onto the market in response to a price rise)
3. The availability of factors of production(to produce more if no stock is available)

Question 2

Conditions for supply

Answer 2

1. Production costs
2. Changes in productivity or technology
3. Entry of new firms onto market
4. Government policy (indirect tax and subsidies)
5. Weather (some goods)
6. Expectations
7. Relative profitability of other goods that could be produced

Question 3

Information failure

Answer 3

Occurs when a lack of information causes consumers/producers to make decisions that don’t maximise their welfare.

Question 4

Regulation

Answer 4

Imposition of laws, standards and controls intended to influence the behaviour of producers and consumers and correct market failure.

Question 5

Advantages of regulation

Answer 5

1. Controls quantity rather than price
2. Easy to understand
3. Cheap to enforce
4. Instant effect
5. Clear level of control
6. Widely used due it’s considerable benefits
7. Backed by law

Question 6

Disadvantages of regulation

Answer 6

1. Cost of enforcement
2. How to set appropriate standards
3. No incentive for improvements once standards have been met
4. Difficult to obtain international agreement
5. Policy may not raise revenue
6. May lead to black market activity
7. Government failure
8. Fines must be imposed
9. Depends on quality of information
10. People may defy the law
11. Firms may go abroad to avoid regulation

Question 7

Advantages of indirect taxation

Answer 7

1. Polluter pays
2. Raise revenue for government
3. Market solution using price mechanism

Question 8

Disadvantages of taxation

Answer 8

1. Depends on size of the tax (difficult to assign monetary value)
2. Depends what the tax revenue is spent on
3. Government may have inaccurate information about costs and benefits
4. Tax Evasion
5. PED - tax passed onto consumers if inelastic
6. Higher prices are inflationary
7. Admin costs
8. May result in firms relocating to other countries with lower taxes
9. Politically unpopular
10. Regressive
11. No overall cap on emissions - some will pollute and pay the tax

Question 9

Advantages of subsidies

Answer 9

1. Reduces pollution levels
2. Increases choice
3. Increases employment

Question 10

Disadvantages/evaluation of subsidies

Answer 10

1. Depends on size of subsidy
2. PED - less effective with inelastic demand
3. Opportunity cost
4. Costly
5. Companies become too reliant on govt subsidies and hence do not try to improve efficiency
6. Takes time to implement

Question 11

Disadvantages/evaluation of information provision

Answer 11

1. Nature and extent of the information failure (eg no of people)
2. Nature of the information provision (medium used etc)
3. Receptiveness of consumers to change their views
4. The time available (more effective over a longer time period)
5. Consumers are not rational
6. Consumers may not understand the information
7. Some choose to ignore it

Question 12

Advantages of tradable permits

Answer 12

1. Internalises the externality i.e the polluter pays
2. Encourages firms to become greener
3. Minimal monitoring
4. Overall level of pollution can be controlled based on number of permits
5. International

Question 13

Disadvantages of pollution permits

Answer 13

1. Difficult to determine appropriate level of pollution
2. Large firms can afford to buy more permits - monopoly
3. Fines must be imposed on those who breach permit
4. Needs regulation or enforcement.
5. Govt need to issue the right number of permits in order to produce the desired reduction in emission levels
6. Can affect geographical distribution of pollution
7. Hard to operate with many countries involved

Question 14

Define property rights system

Answer 14

A system which grants ownership to third parties so that they have the right to sue those creating negative externalities for compensation in order to internalise the externality.

Question 15

Advantages of property rights system

Answer 15

1. Theoretically simple method of achieving an effective economic outcome
2. No need for regulatory authorities to make artificial judgements on the optimal level of pollution.

Question 16

Disadvantages of property rights system

Answer 16

1. Difficult negotiations - who should be given ownership rights to environment?
2. Legal costs can be very high
3. Problem of synergism - difficult to trace the exact cause of environmental damage. Could be due to multiple parties contributing to the damage

Question 17

Advantages of private sector provision

Answer 17

1. Greater competition between self-interested profit maximising firms will lead to increases in quality and lower prices
2. Moral hazard argument suggests that consumers may behave in more desirable ways if they don’t have the safety net of state provision to catch them if they suffer private costs.

Question 18

Disadvantages of private sector provision

Answer 18

1. Consumption depends on an individual’s ability to pay
2. Under consumption will occur
3. Quality of goods may be compromised if prices are too low
4. Regulation required to ensure free market prices and quantities are acceptable

Question 19

Advantages of state provision

Answer 19

1. Consumption accessible to all, regardless of income.
2. Consumption levels will be higher than private provision due to the zero price
3. Regulation of quantity and quality is easier.

Question 20

Disadvantages of state provision

Answer 20

1. Lack of competition may reduce incentives to improve quality
2. Free provision leads to some individuals over consuming a service at the expense of others

Question 21

Determinants of PED

Answer 21

1. Availability of substitutes
2. Time available to adjust spending patterns
3. % income spent in goods
4. Whether or not consumption is habitual

H I T S