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 against regulation
- Cost-Effectiveness
TPPs incentivise firms to reduce emissions at the lowest possible cost compared to rigid regulations.
- Firms with lower costs can reduce emissions and sell excess permits, while firms with higher costs purchase permits instead of implementing expensive pollution controls. This flexibility minimizes overall compliance costs for the industry.
- allows firms to maintain profitability while meeting environmental targets, leading to a more efficient allocation of resources in pollution control. - Encouragement of Innovation
- Firms that develop or adopt cleaner technologies can reduce their dependence on permits and potentially profit by selling unused ones. In contrast, strict regulations impose uniform limits, offering no direct financial rewards for exceeding targets.
- Over time, innovation can lower the cost of emission reduction and contribute to sustainable economic growth while achieving environmental goals. (externality is internalised) - Market Incentives for Participation
- The trading system allows firms to profit, increasing compliance rates compared to regulation.
- Firms that can reduce emissions cheaply are rewarded financially, creating a market-driven incentive structure. Regulations, in contrast, penalize non-compliance without offering any rewards for exceeding targets.
- Higher compliance rates and voluntary participation reduce enforcement costs and ensure that pollution reduction targets are met more reliably. - Reduction in Administrative Burden
Permits reduce the need for detailed monitoring and enforcement required in traditional regulations.
- Once the cap is set, the trading system operates through market mechanisms, reducing the government’s role in dictating specific measures for each firm. In regulatory systems, constant monitoring and adjustment are necessary to enforce compliance.
- A reduced administrative burden lowers the cost to taxpayers and allows environmental agencies to focus on broader goals.
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
Excess Demand
- State provision often results in services being offered at no cost or below market prices, leading to excessive demand.
- Unlike in a free market, where prices adjust to ration demand, the absence of price signals prevents natural equilibrium.
- Creates shortages and longer waiting times, reducing the overall quality and accessibility of services for consumers.
High Costs for Taxpayers
- State provision is funded by taxpayer money, requiring significant public expenditure.
- This may lead to reductions in other areas of government spending, such as infrastructure or defense.
- Places a financial burden on taxpayers and limits the government’s ability to invest in other priority sectors, reducing overall economic efficiency.
Assumption of Perfect Information
- The government assumes it can determine the appropriate level and allocation of resources for state-provided services. In reality, governments often lack sufficient information about consumer preferences or market dynamics.
- Leads to misallocation of resources, resulting in underprovision or overprovision of services, reducing overall welfare
Inefficiency of State-Run Organizations
- State-provided services typically lack the profit motive that drives private sector efficiency. Without competition, these organizations may become complacent, incur higher costs, and waste resources.
- Increases the opportunity cost of public funds, as the resources could have been used more effectively elsewhere in the economy
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
Inaccurate or incomplete information
- The information provided may not fully capture the complexities of a situation, leading to misinformed decisions. For example, calorie labels on food might not account for nutritional value or the broader context of a balanced diet.
Consumer rationality and behavioral biases
- Even with accurate information, individuals may not act rationally due to cognitive biases such as inertia, overconfidence, or misinterpretation of the data. For example, warning labels on cigarettes might be ignored by habitual smokers due to addiction or denial.
- Behavioral inefficiencies can limit the success of information provision in driving the desired changes in consumption or production.
High opportunity cost
- Governments or organizations face significant costs in gathering, verifying, and distributing reliable information through campaigns, advertisements, or digital platforms. For example, public health campaigns like anti-smoking ads require substantial funding for wide outreach.
- These costs may strain public resources, diverting funds from other vital programs or policies, particularly in developing economies.
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
