Micro Ls21-23 Flashcards
1
Q
Discuss tradable, pollution permits
A
- 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
2
Q
What are the advantages of maximum prices?
A
Prices are lowered for consumers
3
Q
What are the advantages of minimum prices?
A
- In agricultural markets, food stability is increased
- can reduce the consumption of demerit goods such as alcohol
- Producer incomes are protected in agricultural markets
4
Q
What is an ETS
A
This is another kind of tradable permit
It stands for emissions trade scheme
5
Q
Describe the emissions trade scheme
A
- 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
6
Q
Define regulation
A
A rule or law enacted by the government that must be followed by economic agents. It is used to encourage a change in behaviour.
7
Q
Describe some command regulations
A
- 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
8
Q
Describe some control regulations
A
- enforcement: e.g., the police
- Punishment: fines or jail sentences
9
Q
What are the disadvantages of maximum prices?
A
- 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.
10
Q
What are the disadvantages of emissions trading schemes?
A
- 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.
11
Q
What are the disadvantages of minimum prices?
A
- 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
12
Q
Define government failure
A
When government intervention designed to correct a market failure results in a less efficient allocation of resources
13
Q
What are the some causes of government failure
Describe them
A
- 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.
14
Q
How to regulations aim to correct market failures?
A
- 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).
15
Q
What are the disadvantages of regulation?
A
- 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
