Things I don't understand

Question 1

Define information failure

Answer 1

Lack of information causes consumers and/or producers to make decisions that don’t maximise their welfare

Question 2

What are the causes of information failure?

Answer 2

• lack of understanding and awareness
• inadequate / misleading info
• persuasive advertising

Question 3

What are the consequences of information failure?

Answer 3

• private benefits may be over/under estimated by consumer = over/under consumption

Question 4

What is a merit good?

Answer 4

• a good whose consumption is better for consumption is better for consumers than they actually realise (consumers underestimate private benefits - under consumed)

Question 5

What is a demerit good?

Answer 5

• a good whose consumption is more harmful than consumers actually realise (over consumed)

Question 6

What are public goods?

Answer 6

• goods and services that would not be provided at all by a free market system

Question 7

What is non-excludability?

Answer 7

• a consumer can not be prevented from consuming the good

Question 8

What is non-rivalry?

Answer 8

• where one consumer’s consumption does not reduce the amount available for consumption by others

Question 9

What is a problem of public goods?

Answer 9

• an individual able to enjoy the benefits of consumption without paying for the good/service

Question 10

What is indirect taxation?

Answer 10

• A tax placed on producers / retailers of a good or service that can be passed on to the consumers

Question 11

What is a subsidy?

Answer 11

• A payment made (usually by a government) to a producer per unit of a good or service that is supplied

Question 12

What is information provision?

Answer 12

• Aims to reduce the information failure associated with the consumption of a good or service by increasing or decreasing demand as appropriate

Question 13

What is regulation?

Answer 13

• Imposition of laws, standards and controls intended to influence the behaviour of producers and consumers and correct market failure

Question 14

What are tradable permits?

Answer 14

• 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

Question 15

What is state provision?

Answer 15

• where a good or service is supplied by central or local government, usually financed from general taxation + free at the point of consumption

Question 16

What does the effectiveness of indirect taxation depend on?

Answer 16

• Size of tax
• PED
• Extent to which the tax can be avoided
• How tax revenue is spent

Question 17

What does the effectiveness of a subsidy depend on?

Answer 17

• 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

Question 18

What does the effectiveness of information failure depend on?

Answer 18

• 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

Question 19

What are the arguments for regulation?

Answer 19

• 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

Question 20

What are the arguments against regulation?

Answer 20

• 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

Question 21

Explain the EU’s emission trading system

Answer 21

• 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

Question 22

What does the effectiveness of tradable permits depend on?

Answer 22

• need to be policed

- how many permits are allocated

Question 23

What are the advantages of state provision?

Answer 23

• consumption accesible to all
• regulation is generally easier
• amount of consumers are likely to be higher than private sector due to the zero cost

Question 24

What are the disadvantages of state provision?

Answer 24

• lack of competition may reduce incentives to improve quality
• free provision may lead to some individuals over-consuming at the expense of others

Question 25

What are the advantages of private sector provision>

Answer 25

• 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

Question 26

What are the disadvantages of private sector provision?

Answer 26

• 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