externalitites Flashcards
types of fixtures of government failure (7)
indirect taxes
subsides
legislation/regulation
price control
tradeable permits
information provision
buffer stock
what is excise/ indirect tax and what products may receive this
A per unit tax on producers - for every unit made, the producer must pay tax. The goal is for them to make less of the goods that the government deems dangerous or unwanted so that supply is at a more socially optimum level
e.g cigs, alcohol
if a good is elastic, who pays more tax and why?
If a good is elastic, producers pay more tax - When demand is elastic, consumers are highly responsive to price changes. If producers try to pass the tax onto consumers by raising prices, the quantity demanded will drop significantly. Therefore, producers bear a larger portion of the tax burden to avoid losing too many customers.
if a good in inelastic, who pays more tax and why
If a good is inelastic, consumers pay more tax as the quantity demanded does not significantly decrease when the price increases. This means that even when the price rises due to an excise tax, consumers will continue to purchase relatively the same amount of the product. This allows producers to pass on most, if not all, of the tax burden to consumers without a significant reduction in sales.
How government can intervene in the free market to fix a problem of negative externalities of Production (3)
Excise tax
Regulation/legislation
Tradeable permits
what is regulation/ legislation
laws limiting the quantity of a good produced or be required to be produced in an environmentally and socially friendly way
how does the gov regulate (4)
Monitoring
Enforcement
Penalties
Incentives
must be significant enough to dissuade firms from ignoring legislation
how regulations/legislation could lead to the social optimum output of products and a gain in welfare for society.
Rule/ law enforced by gov which must be followed by econ agents to encourage a change in behavior
Command: bans, caps(fisherman catching a number of fish limits), smoking/ drinking limits, innovative regulations (diesel cars off from the road)
Control: enforcement, punishment
what is the effect of regulation
firms must buy permits for pollution, regulation will add to the cost of producing harmful goods. Firms face higher costs in adhering to regulations, reducing the supply of demerit goods and creating incentives for firms to produce goods in more environmentally and socially responsible ways
evaluation of legislation (4 points)
Cost
Setting the right regulation
Black markets and unintended consequences- may harm consumers even more as illegal demerit goods may not be as safe
Equity issues not being treated such as pollution caps on firms
advantages of legislation/regulation
Regulation can address negative externalities (e.g., pollution) by setting limits or standards, such as emission caps, to ensure that firms internalize the external costs
Regulations like compulsory education or health standards ensure the consumption of merit goods and limit demerit goods (e.g., banning harmful substances).
Regulations requiring transparency (e.g., nutritional labels, financial disclosures) help bridge the information gap between producers and consumers, leading to more informed decision-making so less asymmetric information.
advantages of buffer stocks (3)
price stability- help stabilize commodity prices and can provide a stable income for producers. this is important for small scale farmers who have limited access to crop/live stock insurance (a market failure)
investment- price stability means producers are able to plan and invest in new capital which can increase yield and quantity leading to higher capita incomes
food security- for low income countries esp maintaining a sufficient amount of key commodity supply prevent food shortages and price spikes after external shocks
disadvantages of buffer stocks (3)
finance- purchasing and storing commodities can be high in cost and govs may struggle to finance this (also opp cost) long term- increased fiscal costs (expense incurred by the government in the implementation of its policies, programs, or interventions)…budget deficit?
there could be distorted incentives- producers may alter their production decisions based on the buffer stock scheme rather than market signals, potentially leading to inefficiencies in resource allocation and if the government consistently buys excess production, it may encourage overproduction, leading to persistent surpluses that are costly to manage- could be seen as a government failure
3 advantages of using subsidies to correct market failure
Helps to change destructive consumer behaviour over a longer period of time e.g. subsidising electric cars makes them affordable and helps motorists to see them as an option for the masses, not just the wealthy
It lowers prices make goods more affordable to those on lower incomes reducing effects of poverty
Subsidies for R&D can lead to technological advancements and increased productivity. if useful things are discovered other firms could also use this which is good as it decreases costs for other firms too
2 disadvantages of using subsides to correct market failure
Subsides are very expensive- how will the government fund them? (opportunity cost)
Subsides may not be used by firms in the way that government intended (gov failure)- if they use to promote bad behavior gov cant control that further pushing away from social optimum as in free market only private benefit considered
How could government intervene to deal with the problem of positive externalities of consumption?
Corrective subsides (to consumers)- a subsidy to consumers of a good will increase the mpb of consumption since individuals now get paid to buy a good and increase the demand for a good. This higher price incentives firms to provide a greater quantity resulting in a more efficient allocation of resources towards the good.
Government provision (service not provided by private sector)- many merit goods are provided by the government such as education, healthcare, infrastructure like airports, police security and more but they may provide low quality due to low funds
Positive advertising-gov programs that educate consumers about the positive private and social benefits of a good may increase demand for the good incentivizing firms to produce more of it such as healthy eating campaigns but asymmetric info
what is asymmetric information
when one party in a transaction has more or better information compared to the other party.
what are 3 impacts of regulating activities that cause negative externalities
reg acts as incentive for business innovation e.g to cut the level of carbon emissions
regulation may be more effective if demand us unresponsive to price changes
regulations can be gradually toughened each yr- this will stimulate capital investment e.g co2 emissions for vehicles
costs/ disadvantages of adding extra regulation to industries
high costs of enforcement and weak penalties might make regulations ineffective
regulations can lead to unintended consequences a cause of gov failure- governments often lack the detailed information that businesses possess, leading to poorly informed decisions. Regulations based on inadequate or incorrect information can misallocate resources, impose unnecessary costs, or fail to address the externality effectively.
the cost of regulation can discourage small business and therefore lead to less competitive in markets and they even may drop out of the market completely
what is state provision (aka direct provision)
when a nationalised industry is the main provider of a good or service. Often the case for public and merit goods
Direct provision of goods and services by the state free at the point of consumption
what is a subsidy (mark scheme answer)
payment to producers (1) which will reduce their production costs
(1) and increase / encourage more production / supply / shift supply
curve to the right (1).
