MICRO - LS22 - Regulation

Question 1

Regulation

Answer 1

• A rule/law enacted by the government that must be followed by economic agents
• used to encourage a change in behaviour

Question 2

Command

Answer 2

• bans e.g. public smoking ban (e.g. in library)
• limits e.g. age limits on buying alcohol/time limits on when it can be served
• caps e.g. carbon emissions caps or fishing caps
• compulsory actions e.g. graphic health warnings on cigarette packets

Question 3

Control

Answer 3

• Enforcement e.g. officers stopping people selling cigarettes to the underage - can shut them down immediately
• punishment e.g. fines/jail sentences

Question 4

Disadvantages of maximum prices

Answer 4

• creates shortages, so goods & services may be distributed on first-come, first-served basis or seller’s preference, often deemed as unfair
• black market may emerge
• costs of enforcement, can be seen as opportunity cost
• hard to set prices at right level, may be information gaps which lead to the price being to low/high
• if max prices intro’d in rental market, then producer surplus falls, so landlords have less money to invest & maintain property, causes long-term decline in quality of housing stock
• price can’t rise to remove excess demand - loses rationing function

Question 5

Disadvantages of ETS

Answer 5

• if there’s an information gap, too many permits can be issued causing little/no incentive for firms to reduce pollution
• information gaps could also cause too little permits to be issued, reduces international competitiveness as firms have to spend more on permits - have to factor the cost into the price, causes decline in X-M, employment & growth
• producers may try to pass added costs to consumers, price inelastic goods/services are likely to become more expensive
• permit price may be volatile, creates uncertainty for businesses
• if permits are given away for free, missed opportunity to raise government revenue
• costs of operating/monitoring the scheme
• competitor firms in other regions, may not be sujets to ETS which improves their relative competitiveness

Question 6

Disadvantages of minimum prices

Answer 6

• creates excess supply, some produces unable to sell goods, potential for losses
• higher prices for consumers, lower consumer surplus
• excess supply represents a waste of resources that could’ve been used more productively elsewhere
• price can’t fall to remove excess supply - loses signalling & incentivising function