Market Failure Flashcards
State how a tradable permits policy works.
The government first determine the socially optimum level of output before issuing the tradeable permits. Tradable permits are permits to pollute that are issued to firms by the government that can be traded in a market. In the case of greenhouse gas emissions, each firm is granted by the government a particular number of permits to discharge a defined quantity of greenhouse gas into the atmosphere over a period of time. The permits can be brought or sold with the price determined by the market demand and supply. If a firm can emit less than the level set by the permits issued to it, it can sell it unused permits in the market. If a firm needs to emit more pollutants than the level set by its permits, it can buy more permits in the market. This system penalizes the buyer for polluting and rewards the seller for reduced emission.
State advantages of tradable permits policy
By setting a cap on the level of permissible pollution, a socially optimum level of emission can be targeted and a reduction in overall pollution level is highly possible.
This system encourages the promotion of cleaner and greener technology to reduce pollution as it provides firms with the incentives to reduce their emissions further to sell its excess permits for more profits.
State limitations/possible costs of tradable permits policy
The government needs to know the efficient level of output, if there is an over or under estimation, then the efficient level of pollution will not be achieved. For tradable permits, there are high administrative costs associated with monitoring pollution emissions as the number of firms involved is large and there is a need for tough systems in each country to verify and report emissions. There could be a rise of inequity in the permit distribution. For larger firms, they are able to get more permits due to the supernormal profits, which could lead to increased level of pollution in a certain area where there are many large firms. For smaller firms, they are unable to pay for more permits and also lack the funds to invest in environmentally friendly production methods.
State how merit goods left to the free market leads to market failure
State how demerit goods left to the free market leads to market failure
State how public goods, if left to the free market, leads to market failure.
Public goods are non-rivalrous and non-excludable. Non-excludable good is a good that cannot be excluded from other parties consuming that good should it be consumed. Non-rivalrous good is a good where the marginal cost of providing that good to others is 0. Due to the good being non-excludable, no consumer will be willing to pay for the good, resulting in no effective demand for the good. Due to the good being non-rivalrous, producing the good will not generate profits for the company, and thus no company will be willing to produce the good, leading to no effective supply. No effective demand and no effective supply results in a missing market for the good, and thus leading to it not being provided.
State how a ban policy works
State advantages of a ban policy
State limitations/possible costs of a ban policy.
State how a tax policy works.
State advantages of a tax policy
State limtations/possible costs of a tax policy
State how public education works to solve market failure.
State advantages of public education.
State limitations/possible costs of public education.
