2.8c Market Failure Flashcards
What are the 9 types of government intervention?
PIGLETS CC
P - Pigouvian Taxes
I - International Agreement
G - Government provision (Direct provision)
L - Legislation and regulation
E - Education (Awareness creation)
T - Tradeable Permit
S - Subsidies
C - Carbon Tax
C - Collective self-governance
What is a “Pigouvian tax”?
Indirect Pigouvian Tax is used to internalise the negative externalities.
ie. the buyer and seller pay for the costs of their own actions, without any burden onto third parties.
What are some advantages and disadvantages of “pigouvian tax”?
Government revenue
–> can fund education on demerit goods
–> direct provision of merit goods
–> subsidise renewable energy production, healthy foods
Discourages consumer consumption
–> less consumers willing and able to buy at a higher price
Disadvantages:
- May encourage illegal activities
- Affects low income earners more than high income earners (regressive tax)
- Difficult to set exact amount of tax
- Demand for demerit goods is price inelastic so the tax may not be significant enough
What is “carbon tax”?
Tax placed on emissions = tax on greenhouse gases
–> Aim is to limit pollution and carbon emissions
What are some advantages and disadvantages of “carbon tax”?
Advantages:
- Reduces emissions
- Incentivizes firms to invest in greener technology
- Easy to set up and administer
Disadvantages:
- If tax is set too low –> firms continue to pollute
- Low economic activity –> Less employment (job losses)
What are “tradeable permits”?
(= cap and trade schemes) are government regulated emissions trading schemes using a market-based approach
The government has issued a fixed amount of tradeable permits (Quantity - Q). Let’s assume there has been an increase in the demand for the goods in the market, which results in firms wanting to produce more, therefore they need more permits so the demand for permits increases. This causes a right shift of the demand curve from D to D1, resulting in a price increase from P to P1.
The aim of the permits is to make the polluter pay for the external costs associated with the production of their goods.
What are disadvantages of “tradeable permits”?
- ANTI-competitive and create job LOSSES
- The problem can be displaced elsewhere
eg. a company moving production into another country - That the cap is too high and ineffective
eg. 5bn tons of carbon emission allowed annually in China - That the demand for the permits is price inelastic –> not really effective
What is “legislation”?
Laws on the use of scarce resources
What is “regulation”?
Monitoring and controlling the activities of firms (regulation of carbon emissions VW 2020)
What are some advantages and disadvantages of legislation and regulation?
- Laws are often broken
- Encourages black markets
Unless: - Strict controls –> impossible to keep track of everyone + very costly (opportunity cost)
- Severe punishment
What are “international agreements”?
Threats to sustainability are global threats because they degrade common pool resources.
–> Need for international agreements
EG. Paris agreement
Challenges faced:
- Not ALL countries are committed to the process
- Each country has its own culture
- Some countries may quit the agreement if they do not believe in it
What is “collective self-governance”?
Voluntary communal actions to tackle the problems of negative externalities and the overuse of CPRS.
What is “education and awareness creation”?
Educating the general public about the costs of consuming demerit goods, and the benefits of consuming merit goods.
–> Through advertising to influence consumer behaviour
This would shift MPB to MSB
–> increase consumption
What are some advantages and disadvantages of “education and awareness creation”?
Advantages:
- Changes behavior and consumption patterns (and therefore firms too)
- Successful advertising can lead to a cultural change in behaviour
Disadvantages:
- There are administrative costs (deadweight loss)
- Not all advertising is successful
- Takes a long time to educate people
- Opportunity cost to the government
What are “nudges”?
Involves the design of methods to influence consumers’ behaviour. They can be used in ways similar to education and awareness creation to encourage consumers to rely less on goods with negative externalities.
They can also be used to encourage desirable behaviour, such as bicycle lanes to encourage car drivers to use bikes instead of cars (this nudges people to use a good externality but also helps reduce negative externalities)
