Year 1 micro - government failure Flashcards
how do trade pollution permits work
- govt will set a pollution cap
- govt issues permits to firms across the economy to match cap
- firms invest in green technology or buy spare permits in the market
advantages of tradable pollution permits
- Incentivises Firms to Reduce Emissions
→ Firms are given a fixed amount of pollution permits
→ If they emit less than their allowance, they can sell excess permits for profit
→ This creates a financial incentive to invest in cleaner technology or greener production
→ Over time, this leads to innovation and a reduction in overall pollution levels - Cost-Effective Way to Reduce Pollution
→ Pollution permits create a market for emissions
→ This means pollution is reduced where it’s cheapest to do so
→ More efficient firms reduce emissions at a lower cost and sell their permits
→ The overall cost to society of achieving a pollution target is minimised - Flexibility for Businesses
→ Firms are not forced to reduce emissions at the same pace
→ They can choose to buy permits if it’s too expensive to cut pollution immediately
→ This flexibility allows for a smoother transition to cleaner operations
→ Reduces the risk of economic disruption or job losses in the short term - Government Revenue Generation
→ Governments can auction permits rather than allocate them for free
→ This provides a source of revenue that can be reinvested
→ For example, funding for green infrastructure or R&D subsidies
→ This supports long-term environmental and economic goals - Promotes Global Cooperation on Emissions
→ Pollution permits can be extended into international carbon markets
→ Countries and firms can trade emission rights across borders
→ This enables collective action on climate change
→ Especially useful in addressing global externalities like CO₂ emissions
evaluation points for tradable pollution permits
- can enforcement be afforded? if not the policy won’t work
- is there sufficient technology to accurately measure emissions?
- we assume that governments have perfect information, the cap level may be too tight/too lacked, which may lead to govt failure
- unintended consequences, increased COP for firms, inflation may occur,firms may shut down or relocate to countries where policy is more relaxed
Impact on Competitiveness
- The scheme could increase costs for domestic firms, potentially reducing their competitiveness in international markets if foreign competitors are not subject to similar environmental regulations. - This might result in “carbon leakage,” where production shifts to countries with lax regulations, offsetting environmental gains.
Dynamic Efficiency and Innovation
- Tradable permits incentivize firms to invest in cleaner technologies to reduce emissions and sell unused permits. However, the extent of innovation depends on the cost of permits and the predictability of the permit market.
- If permit prices are volatile, firms might hesitate to invest in long-term solutions
What is state provision?
Direct provision of goods/services by the government free at the point of consumption
examples of things that are provided by the state
- healthcare
- education
issues with state provision
🏛️ Government Inefficiency
State provision often leads to inefficiency due to the lack of competition
➡️ Without market forces to drive innovation, public sector providers may become complacent
➡️ This inefficiency can result in higher costs and lower quality compared to private sector alternatives
➡️ ⏩ Consumers may suffer from poorer services at higher tax costs
💰 Budget Constraints
The state must allocate resources from the tax base, which may be limited
➡️ Rising demand for state services (e.g. healthcare, education) could outstrip available funds
➡️ This forces the government to cut back on services or raise taxes, impacting economic growth
➡️ ⏩ The quality and quantity of state-provided goods may be compromised
🔄 Government Bureaucracy and Delays
Bureaucratic processes in the public sector can slow decision-making and service delivery
➡️ Long waiting times for public healthcare, social housing, or benefits can frustrate consumers
➡️ Delays increase costs for individuals and the economy
➡️ ⏩ The public sector’s lack of responsiveness reduces the overall effectiveness of state provision
🛑 Risk of Political Influence
State provision is often subject to political decisions, which may not always align with economic efficiency
➡️ Governments may allocate resources based on political priorities rather than market demand
➡️ Short-term political cycles can result in policies that are not beneficial for long-term planning
➡️ ⏩ This can lead to misallocation of resources and inefficient state provision of goods
💡 Lack of Consumer Choice
In state-provided sectors (e.g. health, education), consumers often have little choice over the provider
➡️ This can lead to a one-size-fits-all approach, ignoring individual needs and preferences
➡️ With limited alternatives, consumers cannot choose higher-quality or more tailored options
➡️ ⏩ Lack of choice leads to lower satisfaction and potentially higher opportunity costs for individuals
what is information provision
government funded information advertising to encourage or discourage consumption
advantages of information provision
- Promotes Positive Externalities
- Information provision can correct market failures associated with positive externalities, like education or vaccination.
- Public campaigns highlighting the benefits of vaccinations or renewable energy adoption encourage behaviors that generate societal benefits beyond individual gains.
- Reduces negative outcomes like disease spread or environmental degradation, improved public health and environmental quality. - Supports Behavior Change Without Coercion
- Information provision avoids the need for heavy-handed regulation or taxation.
- Instead of imposing bans or taxes, governments can guide behavior by educating people about healthier diets, energy-saving techniques, or the dangers of smoking. This respects individual freedom while still influencing behavior.
- Achieves policy goals like reduced healthcare costs or lower carbon emissions with minimal resistance from the public, enhancing policy acceptance. - Promotes Long-Term Benefits
- Information provision can lead to sustainable behavioral changes over time.
- Educating consumers about the long-term benefits of recycling, energy efficiency, or financial literacy creates habits that persist beyond immediate incentives.
- Contributes to long-term economic, social, and environmental stability, reducing the need for continuous intervention. - Reduces Information Asymmetry
- In markets with asymmetric information, such as insurance or second-hand goods, information provision improves transparency.
- For example, requiring sellers to disclose the history of used cars or the terms of financial products ensures that buyers are not at a disadvantage due to hidden information.
- Reduces market failures like adverse selection and moral hazard, leading to better functioning and more equitable markets. - Encourages Informed Decision-Making
- Providing information enables consumers and firms to make decisions aligned with their preferences and long-term interests.
- Information on the environmental impact of products, calorie content in foods, or financial risks allows individuals to choose options that better suit their health, sustainability goals, or financial plans. Without this information, choices might be suboptimal due to asymmetric information
- Leads to more efficient resource allocation as consumers’ and firms’ choices better reflect true costs and benefits, enhancing overall welfare.
information provision on a merit good graph
MPB curve shifts right to MSB = MPB + advertising
information provision on a demerit good graph
MPB curve shifts left to MPB + advertising = MSB
how does information provision work
- demand shifts
- consumers can make rational decisions knowing the true MPB
- solves under/over consumption
- and moves us to allocative efficiency
issues with information provision
- Information Overload and Consumer Confusion
When governments or firms provide excessive amounts of information, consumers may struggle to process and interpret it effectively. This can lead to decision paralysis, where individuals are overwhelmed by choices and fail to act optimally. For example, complex nutritional labeling may deter consumers from making informed health decisions, reducing the effectiveness of such policies. - Costs of Implementation and Enforcement
Providing accurate and up-to-date information requires significant government resources, including data collection, research, and dissemination. These costs must be funded through taxation, potentially diverting resources from other essential public services. Additionally, enforcement mechanisms (such as monitoring false advertising or misleading claims) require regulatory oversight, which can be expensive and difficult to sustain. - Asymmetric Information Still Exists
Even with information provision, there may still be a knowledge gap between consumers and firms. Firms often have more technical expertise and may use complex terminology or misleading advertising to manipulate consumer perception. For instance, financial products may be marketed with selective information that obscures hidden fees, leading to suboptimal decisions by consumers. - Limited Impact on Consumer Behavior
Providing information does not guarantee that individuals will change their behavior. Many decisions, such as smoking or unhealthy eating, are driven by habit, social norms, or behavioral biases like short-term gratification. Even with clear information about health risks, consumers may continue making poor choices, reducing the effectiveness of the policy. - Difficulty in Reaching Target Audiences
Some groups, such as low-income individuals or those with lower levels of education, may struggle to access or understand the information provided. Digital divides or language barriers can further limit the effectiveness of information campaigns. If vulnerable populations do not receive or comprehend critical information, the policy fails to achieve its intended outcomes and exacerbates existing inequalities.
what are property rights
- private producer owning a part of common access resources, like a forest
advantages of owning common access resources
- private producer now has incentive not to exploit common access resources because if they did, the impact would be on the individual producer, eg lost income
- so negative externality will be internalised
- if enforced, will reduce quantity to socially optimum level
issues with property rights
- can property rights be efficiently distributed? for air and seas, this wont work
- enforcement is expensive, if the government can’t afford policing, the scheme will break down
- equity, who gets the rights? whoever gets the right has more power
what is government intervention
regulatory action taken by the government that seek to change decisions made by economic agents about economic and social matters
what are trade pollution permits
an allowance on the amount of pollution firms may emit which can be bought and sold in the market.
what is inertia
when consumers have a lack of motivation to make a decision
what is habitual behaviour
a form of automatic and routine behaviour. It is behaviour that people repeat, because this behaviour is easy, comfortable or rewarding
what is consumer rationality
when consumers act in a way that maximises their welfare
what is government failure
occurs when government intervention in the economy causes a net welfare loss/
what is nationalisation
the act of taking industries with private ownership and placing them in the hands of the government
benefits of nationalisation
Higher Wages Through Trade Union Negotiations
- Trade unions are more likely to secure higher wages when negotiating with governments rather than private firms, as public sector employers often prioritize social welfare.
- Can encourage an expansion in the labor supply due to better compensation
Greater Job Security
- Government ownership ensures stability and continuity in employment, as public enterprises are less likely to downsize in response to short-term market fluctuations.
- Provides employees with financial stability and reduces unemployment risks, fostering long-term economic security
Captures Monopoly Profit for Public Benefit
- When industries are nationalised, monopoly profits are redirected from private shareholders to the government, which can reinvest them into public services.
- Ensures that the financial gains from essential services are utilised for societal benefits
External Economic Benefits of Public Investment
- Publicly controlled industries can focus on generating positive externalities, such as infrastructure improvements or environmental sustainability.
- Leads to long-term societal benefits, including improved productivity, reduced pollution, and enhanced public welfare
Lower Costs for Consumers
- State ownership often prioritizes affordability over profit maximization, leading to reduced prices for essential goods and services like utilities or public transport.
- Enhances consumer welfare and reduces cost-of-living pressures, especially for low-income households
cons of nationalisation
- Diseconomies of Scale and Inefficiency
When industries are nationalized, they often grow too large and bureaucratic, leading to inefficiencies in decision-making and resource allocation. Without the profit motive, there is little incentive to minimize costs, and inefficiencies can accumulate. Over time, these inefficiencies result in higher operational costs, which may be passed onto consumers through higher prices or require taxpayer support to keep services running. - Lack of Incentive to Minimize Costs
Unlike private firms that must operate efficiently to survive in a competitive market, nationalized industries do not face the same pressure to control costs. Managers and employees may have little motivation to cut unnecessary expenditures, leading to higher operational expenses. Without competition, there is also less drive to innovate, meaning that productivity growth stagnates, further exacerbating inefficiencies like productive. - Complacency and Wasteful Production
Since nationalized firms do not have to compete for survival, they may become complacent and prioritize administrative processes over efficiency and innovation. This often results in excessive staffing, misallocation of resources, and slow adaptation to changing consumer needs. As a result, public services may decline in quality, while operational costs continue to rise, making it more expensive to maintain the industry. - Lack of Supernormal Profit for Investment
In the private sector, firms reinvest profits into research and development, improving productivity and driving long-term growth. However, in a nationalized industry, profits are often absorbed by government budgets rather than reinvested. This means that industries under state control may struggle to modernize and innovate, leading to outdated infrastructure and lower competitiveness in global markets. - Expensive and a Burden on Taxpayers
Nationalized industries often require significant financial support from the government, which must be funded through higher taxation or increased borrowing. If these industries operate inefficiently, they may continuously drain public finances, creating a long-term fiscal burden. This means taxpayers may have to subsidize loss-making industries, diverting funds away from critical services such as healthcare, education, and infrastructure. - Higher Prices Due to Low Competition
Without competition, nationalized industries may have little incentive to keep prices low or improve service quality. Since there are no market forces pushing firms to be more efficient, consumers may face higher costs for goods and services. For example, monopolistic state-run transport or energy sectors might set prices at inefficiently high levels, leading to lower consumer welfare and reduced affordability. - Greater Risk of Moral Hazard
Since nationalized industries are backed by the government, managers and employees may take excessive risks or mismanage resources without facing direct consequences. Unlike private firms, which bear the financial risk of poor decisions, nationalized industries can rely on government bailouts if they become unprofitable. This moral hazard can lead to careless spending, inefficient production, and long-term financial instability.
