What happens when you leave MERIT GOODS to the free market (no gov intervention)?
Merit goods- under provided and underpriced so misallocation of resources and market failure
What happens when you leave DEMERIT GOODS to the free market (no gov intervention)
Demerit goods- over provided and underpriced priced so misallocation of resources and market failure
What are the 8 government interventions used to reduce market failure?
MISTER PM
1) Minimum price
2) Indirect tax
3) Subsidy
4) Tradeable Pollution Permit
5) Extention of property Right
6) Regulation
7) Provision of information / Persuasion
8) Maximum Price
What is the chain of reasoning/analysis on the use of indirect tax to reduce market failure?
Increase the cost of production
Internalises externality (Polluter pays)
Stops over consumption and production
allocated efficiency occurs as consumer welfare is maximised
Government revenue is also generated
What are 3 Pros and Cons of using indirect tax to reduce market failure?
+ Reduces any over consumption or overproduction of demerit good, prices rises
+ Generates gov tax revenue, money for public goods
+ Internalises the negative externality, polluter pays
- Regressive, tax only effects small corps
- ineffective if demand is inelastic
- Black market and illegal transactions, high prices means consumers will find other wayss (black market stuff may be even worse to consume)
What are 3 pros of using subsidies to reduce market failure?
+ Lowers the cost of production which encourages more firms to enter and supply more, solving underconsumption
+ Lowers price inequality so merit goods consumption is more accessible
+ LR decreases cost to gov
What are the 3 cons of using subsidies to reduce market
-Subsidies increase government spending and may cause a budget deficit if funded by borrowing
-Subsidies can cause government failure by encouraging firms to become inefficient and dependent.
-Subsidies have an opportunity cost as government funds could be spent on other public services.
What are 3 Pros of using regulations to reduce market failure?
+ Regulation is not regressive as it does not increase prices or disproportionately affect low-income consumers. more equitable
+ Regulation is enforced by law. Firms and consumers must comply, or they face fines or legal penalties, making regulation more effective than voluntary measures.
+ Regulation reduces demerit goods and negative externalities by limiting harmful activities.
What are 3 cons of using regulation to reduce market failure?
What are 3 cons of using regulation to reduce market failure?
-Black market emerges which means less tax revenue so less spending on public goods
-High admin and monitoring cost
-Rules increase production costs, which raises prices and reduces international competitiveness.
What it is a Tradable pollution permit?
When a firm need to buy are permit for per tonne of pollution they produce because the country has a limit on how many tones can be made
What are 3 pros of using a Tradable Pollution Permit to reduce market failure?
+ Internalises any negative externality produced, polluter pays
+ Incentives firms to create green technological advances instead of buying more and more permits
+ Tradable pollution permits raise government revenue when permits are auctioned, which can be used to reduce environmental damage.
What are 3 cons of using Tradable pollution permits to reduce market failure?
-admin and monitoring of permits is expensive
-regressive = tax in larger firm can easily be paid off but tax on smaller firm is hard to p pay off
-too many rules , higher cost of production = reduces international competitiveness
What are 3 pros of using persuasion and advertising to try and reduce market failure?
+ Persuasion is a behavioural tool that encourages consumers to change behaviour voluntarily (rather then forcing)
+ Improves consumer information but preventing asymmetric information in demerit goods like cigs thus helps gov in long term
+ relatively low cost compared to subsidies and regulation
What are 3 cons of using persuasion and advertising to try and reduce market failure?
-generates no fiscal revenue, limiting the government’s ability to fund further intervention
-a voluntary policy, persuasion lacks compulsion and may be ignored by consumers.
-opportunity cost, as scarce resources could be allocated to alternative policies.
what is the problem with buying things in black market?
quality of good may be bad in
black market causing further problems
may chase smuggling of goods
tax revenue is lost
What are 3 pros of minimum price to reduce market failure?
+ A minimum price provides price stability, supporting producers of goods with positive externalities.
+ price mechanism, using higher prices to reduce quantity demanded, nothing is banned
+ correct negative externalities by reducing overconsumption of harmful goods.
What are 3 cons of minimum price to reduce market failure?
-if demand is price inelasticminimum price will have small effect on quantity demanded, reducing effectiveness.
-regressive as higher prices take a larger proportion of low-income consumers’ income.
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What are 3 pros of maximum price to reduce market failure?
Affordable / Equality – helps low-income consumers
Consumer protection / Price assurance – prevents spikes in prices and stops exploitation
Merit goods / Positive externalities – ↑ consumption
encouraged postive externalities
increase provision jf merit goods
What are 3 cons of maximum price to reduce market failure?
Government failure / Lack of info – Price may be set too low → shortages.
Low profit incentive for firms – Reduces supply, may lower quality.
Excess demand (Costing govt) – Shortages may require subsidies or rationing → government expenditure.
What is government failure definition?
Government failure occurs when government intervention to correct market failure either fails to fix the problem or makes it worse, resulting in a net welfare loss, where the costs of intervention exceed the benefits.
What are some reasons behind gov failure?
used for eval of gov intervention
1) lack of info and planning
2) gov corruption- gov solves own problems and not people’s
3) time - lag - recognition, implementation behavioural lag
4) admin cost > benefit
