Market Failure

Question 1

Indirect taxation (4)

Answer 1

• Size of the tax ( and hence the size of the decrease in supply)
• Price Elasticity of demand
• Extent to which the tax can be avoided
• How the tax revenue is spent

Question 2

what is indirect taxation?

Answer 2

Any tax placed on producers/retailers of a good service that can be passed onto consumers of that good or service

Question 3

What is a Subsidy

Answer 3

A form of payment (usually made by the government) to influence production or consumption of a good or service

Question 4

Subsidy (4)

Answer 4

• Size of subsidy (and hence the size of the increase in supply)
• the Price elasticity of demand
• The extent to which a subsidy can be diverted away from the production or consumption of the targeted good
• the opportunity cost of the tax revenue spent on the subsidy

Question 5

what is information provision

Answer 5

aims to reduce the information failure associated with the consumption of a good/service by increasing or decreasing demand as appropriate

Question 6

information provision (4)

Answer 6

• the nature and extent of the information failure
• the nature of the information provision
• the receptiveness of consumers and producers to change their views and behaviour
• the time available

Question 7

what is regulation?

Answer 7

the setting of laws, standards and guidelines to influence production or consumption and to correct potential market failures

Question 8

Regulation advantages

Answer 8

• Cheap, quick and easy to impose
• Sets a clear standard that can be easily understood
• can be backed up by fines and other incentives to comply
• Should have an instant effect

Question 9

Regulation disadvantages (4)

Answer 9

• costly to police and enforce
• difficult to set the right standard
• some producers/consumers may seek to avoid the regulation or be unaware of it
• there is no incentive for firms to improve beyond the regulation

Question 10

What is Tradable pollution permits

Answer 10

creating property rights for a particular activity that can be bought or sold, with the resulted market being manipulated to achieve a specific outcome.

Question 11

Tradable Pollution Permits (3)

Answer 11

• Difficult to decide how to allocate permits intially
• Still has to be policed/enforced (costly)
• Depends on PED

Question 12

What is State provision?

Answer 12

A good or service is supplied by the local government, usually financed by general taxation and free at the point of consumption

Question 13

State provision, advantages (3)

Answer 13

• Consumption is accessible to all irrespective of income
• Consumption levels likely to be higher due to the zero price
• regulation of quantity and quality is generally easier

Question 14

State Provision, disadvantages (3)

Answer 14

• lack of competition may reduce incentives to improve quality
• free provisions may lead to some individuals over consuming at the expense of others
• arguably government will not make the most efficient use of resources as they do not have the profit motive

Question 15

Private sector provision, advantages (2)

Answer 15

• Private sector will be more efficient as there is more self interest
• consumers may behave in more desirable ways if they don’t have the safety net of state provision to catch them

Question 16

Private sector provision, disadvantages (4)

Answer 16

• consumption depends on individual’s ability to pay
• some goods/services will be under consumed
• quality may be compromised if prices are too low
• regulation may be required to ensure free market prices and quantities are accepted.