Regulation

Question 0

Evaluate regulation

Answer 0

1. Violation?
2. Opportunity cost in terms of revenues and private welare
3. Black markets, unfair rationing
4. No revenue/cost
5. More definite than info provision
6. Works where Tax/Sub don’t (PEDt know the OC of pollution reduction to firms - how can they minimise it. Firms have the incentive to report higher cost of pollution reduction. V IMP PT
7. Optimum level of consumption for a merit/demerit good is a value judgement if PED inelastic (at benefit of expert knowledge however)

Question 1

Analysis of Regulation

Answer 1

1. Compliance costs, or actual reduction in negative externality, or quota
2. Aims to change consumption to socially efficient level, or reduce external costs/benefits
3. Ensure that welfare is again maximised
   - Transmission mechanism?

Question 2

Explain how regulation improves allocative efficiency for a demerit good.

Answer 2

Regulations try to raise costs to cover the external costs, or to reduce the externalities altogether. So regulations internalise the externality to an extent, while it also reduces the externality somewhat. Better practices encouraged by regulations reduces the externality, and so MSC curve shifted downwards, while compliance costs shift MPC upwards.

Question 3

What if the regulations are too stringent

Answer 3

However, if the regulations are too stringent, then it may be likely that polluting firms will begin to take more risks in trying to bypass the regulation for example by trying to dispose of waste in different illegal ways, which perhaps raises the negative externalities and the reduces social welfare even further, and also overly stringent regulation would raise the required government spending on enforcing and verifying breach of the regulations.