Micro Ls21-23

Question 1

Discuss tradable, pollution permits

Answer 1

• A limit is set on the total amount of pollution firms are allowed to emit over a period of time
• The government allocates pollution permits to firms (these can be free/priced) this allows firms to pollute up till the limit set. These permits can be traded hence a.k.a. tradeable pollution permits
• The government monitors the emissions of firms and if they pollute below the level set the the permits can be sold. If a firm breaks the pollution limit, then they will face fines unless they purchase pollution permits

Question 2

What are the advantages of maximum prices?

Answer 2

Prices are lowered for consumers

Question 3

What are the advantages of minimum prices?

Answer 3

• In agricultural markets, food stability is increased
• can reduce the consumption of demerit goods such as alcohol
• Producer incomes are protected in agricultural markets

Question 4

What is an ETS

Answer 4

This is another kind of tradable permit
It stands for emissions trade scheme

Question 5

Describe the emissions trade scheme

Answer 5

• A market is created for buying and selling pollution permits. This means the price mechanism is used to internalise the external costs of carbon emissions.
• Incentive is given to invest in pollution-reducing technology
• Cleaner firms are rewarded and less environmentally-friendly firms are punished
• Unused permit can also be sold or banked, this is a father incentive to reduce carbon emissions
• Revenue can also be raised by selling the permits rather than giving them away for free

Question 6

Define regulation

Answer 6

A rule or law enacted by the government that must be followed by economic agents. It is used to encourage a change in behaviour.

Question 7

Describe some command regulations

Answer 7

• Banning: e.g a public smoking ban
• Limits: e.g. age limits on buying alcohol
• Caps: e.g. carbon emissions caps or fishing caps
• Compulsory actions: e.g. graphic health warnings on cigarette packets

Question 8

Describe some control regulations

Answer 8

• enforcement: e.g., the police
• Punishment: fines or jail sentences

Question 9

What are the disadvantages of maximum prices?

Answer 9

• Shortages can be created which means goods and services may be distributed on a first come first serve basis or to sell his preference. This is often deemed unfair.
• A black market may emerge
• The cost of enforcement can be seen as an opportunity cost
• It can be difficult to set the price at the right level and there may be an information gap which can lead to the price being either too high or too low
• In a rental market producer surplus often falls, which means landlords have less money to invest and maintain their property. This means there is a long-term decline in the quality of the housing stock.

Question 10

What are the disadvantages of emissions trading schemes?

Answer 10

• If there is an information gap this could result in too many permits being issued, which would lead to little/no incentive for firms to reduce pollution
• if there is an information gap and too few permits are issued, a result of this can be a reduction in international competitiveness which would lead to a decline in (X–M), employment, and growth
• Producers may try to pass the added cost onto consumers. This means price inelastic goods and services are likely to become more expensive e.g. electricity/steel.
• Prices may be volatile, which can create uncertainty for businesses
• If permits are given away for free, it is a missed opportunity to raise government revenue
• There is an opportunity cost of operating and monitoring the scheme
• Competitive firms in other regions, such as China and the US are currently not subject to emissions trading schemes. This means that they are relatively more competitive.

Question 11

What are the disadvantages of minimum prices?

Answer 11

• excess supply can be created which means producers may not be able to sell goods and this would lead to potential for losses
• Higher prices for consumers, which would lead to a lower consumer surplus
• Excess supply can represent a waste of resources that could have been used more productively elsewhere

Question 12

Define government failure

Answer 12

When government intervention designed to correct a market failure results in a less efficient allocation of resources

Question 13

What are the some causes of government failure
Describe them

Answer 13

• Unintended consequences: this means government failure caused a worse outcome than before government intervention was implemented. E.g. high taxes on cigarettes created a black market for cigarettes.
• distortion of price signals: maximum prices and minimum prices can result in shortages and gluts. Subsidies can result in lower prices and greater consumption of goods with external costs. E.g. subsidies for sugar farmers.
• excessive administration costs: the admin costs of government intervention may outweigh any benefits that result from it. E.g. drug prohibition.
• Information gaps: a lack of sufficient information can lead to government intervention being set ineffectively. E.g. the promotion of diesel cars by European governments.

Question 14

How do regulations aim to correct market failures?

Answer 14

• Regulation provides an incentive to change behaviour towards the socially optimum level of output
• If correctly implemented this can lead to the removal of a welfare loss (or a welfare gain for positive externalities).

Question 15

What are the disadvantages of regulation?

Answer 15

• Cost: regulation can be costly through administration and enforcement
• Setting the right level of regulation can be difficult
• It may encourage black markets to arise
• There may be unintended consequences

Question 16

Describe the guaranteed minimum pricing scheme

Answer 16

Where the surplus output created is purchased by a government agency at the minimum price. The main aim of the scheme is to protect producer incomes.

Question 17

What are the advantages of minimum pricing schemes?

Answer 17

• Producers incomes increase/stabilise which means that is greater investment and employment
• Greater security of food supply
• Surplus can be stockpiled or used as aid

Question 18

What are the disadvantages of minimum pricing schemes?

Answer 18

• Surplus is maybe sold overseas at lower prices and this could be damaging to farmers in developing countries who may struggle to compete
• There is an opportunity cost of government finances, and it may have to raise taxes or cut government spending in other areas
• It is difficult to set price at the right level as there may be an information gap
• Storage and security costs for the stockpilers

Question 19

What is a moral hazard?

Answer 19

This is when parties engage in risky financial behaviour as they know they are not fully accountable for the consequences. This may be because they are backed by a larger organisation e.g. the government or central bank who will bail them out of any situation.