Gov. Policies to control Indiv. Behaviour

Question 1

What Gov. Intervention in Tobacco + Alcohol markets take place?

Answer 1

Information + Negative Advertising

Smoking Kills + Drinking guidelines etc.

Question 2

What assumptions are made for the Alcohol + Cigarette markets?

Answer 2

Many Buyers + Sellers
Demand for each Good is Downward sloping
Supply for each Good is Upward sloping
No 'Secondhand smoke or Drunk Driving'
Those who smoke + drink are aware of what they are getting themselves into

Question 3

What are the 2 main economic reasons for Gov. Intervention

Answer 3

Information Problems- lack of knowledge/inability to think clearly
-Gov. can provide info of dangers- make decisions for people
Negative Externalities- consumption may have adverse effects on 3rd parties
-These costs are ignored by the market- must be accounted for by Gov.

Question 4

Why do Information Problems need to be intervened?

Answer 4

If market NOT regulated–> People in market make poor choices- may be due to lack of Info/Poor judgement by individual
Gov. can warn people on consequences
Even w/ Info- people can still make bad choices- Gov. can make it illegal/impose restrictions- e.g. Age restrictions

Question 5

What are Negative Externalities?

Answer 5

Point of Market Efficiency- everyone benefits or is unaffected by transaction
Tobacco Neg. Externalities: -Illness + Death
-Passive Smoking
-Increased Healthcare costs- Burden on Taxpayer
-Non-smokers pay premiums on health insurance
increased cost to Social Security systems- NHS + Medicaid

Question 6

Draw the Externalities diagram

Answer 6

Social Cost to Left of Supply- Marginal Cost
Demand= Marginal Benefit
P’>P*
Q’

Question 7

How do Taxes solve Negative Externalities?

Answer 7

Taxes–> Increase Private Cost–> Shifts Left on to Social Cost
Shift Cost from 3rd Party to Individual
Only those willing to pay higher price will consume

Question 8

What is the impact of a tax on Smoking + Drinking?

Answer 8

They are Reduced but NOT Removed
If Tax = Value of Externalities- Tax Rev. should be sufficient to cover cost of externalities
–Implies there is an economically acceptable no. of expected Negative Externalities

Question 9

How does the success of a tax depend on Elasticity?

Answer 9

Habit-forming Goods–> Inelastic Demand- relatively small Decrease in Qd- Reduces Effectiveness of tax
Producer can shift most of the burden of the tax on to Consumers

Question 10

How have the Gov. tried to reduce Obesity + Unhealthy eating?

Answer 10

August 2016- Soft Drinks Levy
Reduce Junk Food Adverts on TV + Online
Ban Sweets + Fatty snacks sold at checkout
Traffic Light System

Question 11

How can the Gov. reduce the main Negative Externalities?

Answer 11

Product Taxes
Educational + Informational programmes
Restrict Advertising of unhealthy food on Children TV
Subsidise Healthy meals
Incentivise Healthy behaviour- monetary + non-monetary

Question 12

How is the Effectiveness of Educational Information affected?

Answer 12

e.g. Providing caloric info may have only a small effect

Question 13

How is the Effectiveness of Product Taxes affected?

Answer 13

Subsidies to fruit + veg–> Increase Healthy food consumption
Soft drink Tax–> Lowered Consumption- BUT offset by Increase in consumption of other high-caloric drinks

Question 14

How is the Effectiveness of Financial Incentives affected?

Answer 14

Non-monetary- Increase choice of fruits compared to unhealthy snacks in schools
Small cash prizes have larger effect than cash-equivalent prizes in schools