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
- the externality will always be internalised as the firms (polluters) are paying the cost to society and they are paying in the most cost effective way
- with strict enforcement, pollution will come down to SO level
- the policy promotes long run incentive for firms to invest in green tech. those who invest will also not be affected by permit prices rising
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
- need for international cooperation, because climate change is a global market failure. getting international cooperation is very hard
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 is created, in the free market this wouldn’t be an issue because prices will rise to ration excess demand
- expensive, taxpayers money being used to fund, may lead to higher taxes, cuts to other areas to government spending in the economy
- assumption that govt has perfect information
- inefficient, state run organisation tend to be inefficient as they do not have a profit motive, oppurtunity cost may occur
what is information provision
government funded information provision/advertising/education to encourage or discourage consumption
advantages of information provision
- not paternalistic or interventionist, govt isn’t forcing
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 = MSC
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
- expensive, oppurtunity cost may occur
- theres no guarantee of success, up to consumers, especially if it doesn’t targe the right consumers
- likely to work in the long run, not short run, as the information needs to be absorbed by consumers for them to change habits
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
