Chapter 5: Microeconomic policies

Question 1

What are the types of government policies that can be adopted to achieve efficiency?

Answer 1

1. Direct provision
2. Joint provision
3. Taxes
4. Subsidies
5. Quota
6. Tradable permits
7. Rules and regulations
8. Provision of information

Question 2

What is direct provision?

Answer 2

Direct provision of a good refers to to provision of goods and services by the government either up to the socially optimum level or fully financed (but produced by private firms -meaning that firms are fully subsidised for COP)
Occurs when there is full or partial market failure

Question 3

What are limitations of direct provision?

Answer 3

• may put a strain on government budget, and may have to incur opp cost should they redirect resources from other key sectors like healthcare or education
• production by government may be of lower quality as the gov may not have the tech expertise

Question 4

What is joint provision?

Answer 4

Joint provision of the good refers to the provision of goods and services by both the government and private firms up to the socially optimum level

Question 5

What are the limitations of joint provision?

Answer 5

• there is complexity involved in drafting partnership and monitoring. Should the gov be unable to adequately gather the costs and benefits, the partnership may cost more than if the gov were to directly provide; thereby potentially leading to a greater DWL

Question 6

What are taxes?

Answer 6

The gov imposes a tax per unit of output equal to the MEC at Qs. Taxes increase the cost of production incurred by producers, thereby increasing the price of the goods to tackle overconsumption. Producers internalise the MEC and the MPC curve shifts to MPC tax. Qs will thus be attained

Question 7

What are the limitations of taxes?

Answer 7

• it is difficult to estimate the monetary value of the external cost of production
• can possibly increase inequity as some services become too expensive for those of lower income groups to afford

Question 8

What are subsidies?

Answer 8

The gov imposes subsidies per unit of output equal to MEB at Qs. Subsidies reduces the COP and thus producers will produce more at lower prices. Producers internalise the MEB and the MPC curve shifts to MPC subsidy. Qs will thus be attained.

Question 9

What are the limitations of subsidies?

Answer 9

• it’s difficult to identify 3rd parties and to measure the extent of external benefits
• the external benefits may differ for diff firms/ consumers; difficult and costly to provide different subsidies fir each firm/ consumer

Question 10

What are quotas?

Answer 10

A quota is a legal restriction on the quantity of goods and services that can be produced in a particular time period. To prevent overconsumption/ overproduction, the gov can impose a quota equal to the socially optimum level (producers cannot produce beyond Qs)

Question 11

What are the limitations of quotas

Answer 11

• a shortage will occur in the market which will result in upwards pressure on prices; a problem of inequity may arise (only more affluent sectors of society can consume the good)

Question 12

What are tradable permits?

Answer 12

A tradable permit gives a firm the right to emit a certain quantity of pollution into the environment. The gov measures the maximum amount of pollution permissible (Qs) and issue permits. A firm can purchase permits from other firms that pollute less

Question 13

What are the limitations of tradable permits?

Answer 13

• if larger firms continuously purchase permits from other firms without reducing its emissions, the pollution may become to concentrated in one area which can affect the health of nearby residents
• gov also has to invest in equipment to measure the level of emissions of each firm which adds strain to the gov budget

Question 14

What are rules and regulations?

Answer 14

The use of legal intervention to force consumers and producers to behave in certain ways eg reduce overconsumption/ overproduction. A total ban may be imposed when the negative externalities are very significant (market output is 0) eliminate DWL when Qs=0

Question 15

What are the limitatIons of rules and regulations?

Answer 15

• allocative efficiency is achieved at the expense of productive efficiency as firms are not allowed to choose the least cost methods of production
• it can be costly to impose an adequate measure which gives rise to opp cost

Question 16

What is provision of info?

Answer 16

It raises the awareness of the actual benefit of a good/ service which increases consumers’ perceived benefit, resulting in a higher consumption’s of the good/ service. Removes the divergence between perceived MPB and actual MPB if successful

Question 17

What are the limitations for provision of info?

Answer 17

• the outcome of such information campaigns is uncertain as it is difficult to change the mindsets of people and thus may take a long time