Things I don't understand Flashcards
Define information failure
Lack of information causes consumers and/or producers to make decisions that don’t maximise their welfare
What are the causes of information failure?
- lack of understanding and awareness
- inadequate / misleading info
- persuasive advertising
What are the consequences of information failure?
- private benefits may be over/under estimated by consumer = over/under consumption
What is a merit good?
- a good whose consumption is better for consumption is better for consumers than they actually realise (consumers underestimate private benefits - under consumed)
What is a demerit good?
- a good whose consumption is more harmful than consumers actually realise (over consumed)
What are public goods?
- goods and services that would not be provided at all by a free market system
What is non-excludability?
- a consumer can not be prevented from consuming the good
What is non-rivalry?
- where one consumer’s consumption does not reduce the amount available for consumption by others
What is a problem of public goods?
- an individual able to enjoy the benefits of consumption without paying for the good/service
What is indirect taxation?
- A tax placed on producers / retailers of a good or service that can be passed on to the consumers
What is a subsidy?
- A payment made (usually by a government) to a producer per unit of a good or service that is supplied
What is information provision?
- Aims to reduce the information failure associated with the consumption of a good or service by increasing or decreasing demand as appropriate
What is regulation?
- Imposition of laws, standards and controls intended to influence the behaviour of producers and consumers and correct market failure
What are tradable permits?
- A market based approach for correcting market failure that involves creating property rights for a particular activity that can be bought and sold, with the resulting market being manipulated to achieve desired outcome
What is state provision?
- where a good or service is supplied by central or local government, usually financed from general taxation + free at the point of consumption
What does the effectiveness of indirect taxation depend on?
- Size of tax
- PED
- Extent to which the tax can be avoided
- How tax revenue is spent
What does the effectiveness of a subsidy depend on?
- the size of the subsidy
- the PED
- the extent to which a subsidy can be diverted away from producers or consumers of the targeted good
- opportunity cost of tax revenue
What does the effectiveness of information failure depend on?
- nature and extent of the information failure
- the nature of information provision (e.g medium used)
- receptiveness of producers and consumers to change their views and behaviour
- time available
What are the arguments for regulation?
- relatively easy and cheap to impose
- sets a clear standard that should be easily understood
- should have an instant impact
- can be backed up by fines and other incentives to comply
What are the arguments against regulation?
- costly to police and enforce
- difficult to set the right standard
- some producers and consumers may be unaware of the regulation and seek to avoid
- no incentive to improve beyond regulation
Explain the EU’s emission trading system
- allows holder of permit to emit one tonne of carbon
- creates incentive as if a permit is not used producers may sell (this will allow them to dec cost of production)
- over time, permits should be reduces as this will make them more expensive - increasing incentive for producers
What does the effectiveness of tradable permits depend on?
- need to be policed
- how many permits are allocated
What are the advantages of state provision?
- consumption accesible to all
- regulation is generally easier
- amount of consumers are likely to be higher than private sector due to the zero cost
What are the disadvantages of state provision?
- lack of competition may reduce incentives to improve quality
- free provision may lead to some individuals over-consuming at the expense of others
What are the advantages of private sector provision>
- greater competition between self interested profit maximising producers will lead to increases in quality and lower prices that will benefit consumers
- moral hazard argument - consumers may behave in more desirable ways if they don’t have the safety net of state provision to catch them if they suffer private costs
What are the disadvantages of private sector provision?
- consumption depends on an individuals ability to pay
- some goods and services will be under-consumed
- quality may be compromised if prices are driven too low
