Microeconomics Real Life Examples (V2)

Question 1

Policies to combat the tragedy of the commons: lack of private ownership leading to over-use by private individuals who ignore long term depletion

Answer 1

• Indonesia: Over-fishing predicted to deplete fishing grounds by 2030
• Holland: Fishing license VISpas allows individuals to catch fish in Holland for a year, only obtainable by joining an angling association and paying a fee of 40 Euros
• Australia: Coral harvesting in the Great Barrier Reef, annual quota of 200 tonnes shared by 59 licenses

Question 2

International Agreements: Cooperations between countries to solve the consequences of the tragedy of the commons

Answer 2

Montreal Protocol

• Aim: Protect ozone layer by reducing production of ozone-depleting substances
• Pros: 99% of ozone-depleting substances phased out; Reduced 280 million skin cancer incidents
• Limitations: Substitute materials pollute drinking water and air; Encourages black markets

Question 3

Positive Production Externality: External benefits created by producers

Answer 3

R&D

• Subsidy: HKITF funded 8500 projects with a total funding of HKD 8 billion, with over 3000 approved innovation and technology support programme projects
• Regulations: Tax deductions of 300% to designated HK research institutions

Question 4

Negative Production Externality: External costs created by producers

Answer 4

Air Pollution

• Details: Over 35 billion tonnes of greenhouse gases per year, reduced life expectancy by 3.1%, rose temperatures by 1.5 Celsius (global warming)
• Regulations (HK): Vehicle emission control program to phase out old diesel commercial vehicles and replace catalytic converters on taxis and buses + adopt tighter emission standards ➜ Roadside air pollutants reduced by 38% from 2012 to 2021
• Indirect tax (Japan 2012): All carbon emissions from fossil fuels at 289 yen per tonne of CO2 produced, tax revenue invested in clean teach
• Tradable permits (EU emission trading scheme): 98 Euros per tonne of CO2 ➜ cut emissions by 42.8% since 2005

Question 5

Positive Consumption Externality: External benefits created by the consumption of a good or service

Answer 5

Education (HK)

• Regulations: All children required to attend school from the age of 6 and undergo 9 years of compulsory education ➜ 96% adult literacy rate, 3.8% unemployment rate, 4th highest HDI globally
• Direct Provision: Free education in the public sector with 400 public sector secondary schools

Healthcare (HK COVID-19)

• Regulations: All government employees requires to take COVID vaccine and carry the vaccine pass
• Direct Provision: Free COVID-19 vaccines ➜ provided over 20 million doses by 2023, with 94.6% vaccinated with first dose and 93% vaccinated with second dose
• Opportunity Cost: Spent over 8.4 billion HKD for the procurement and administration of the vaccines

Question 6

Negative Consumption Externality: External costs created by the consumption of a good or service

Answer 6

Cigarettes (HK)

• Details: 580,000 people still smoke daily, causing 7000 annual deaths ➜ Estimated loss of 5.6 billion HKD annually due to lower productivity / healthcare costs
• Indirect tax: $38 per pack (~$1.9 per cigarette) ➜ Inelastic PED of -0.71, tax is insufficient to discourage consumption
• Advertisement: Mandatory health warning to cover 85% of a package, with 24 variant. At least 12 warnings required per package
• Regulations: Banned in public transport, hospitals and malls with $1500 fine ➜ issued over 9700 penalties in 2017; enforcement opportunity cost of over $101 million HKD
• Education: HK Council on Smoking and Health established “Smoke-free Teens Program” since 2012 to educate smoke-free principles to over 160 schools and teen communities ➜ relies on self-driven reduction of demand
• Smoking prevalence rate dropped from 23.3% in 1980 to 9.5% in 2021