Classic Micro Economic Arguments

Question 1

Policies for correcting market failure associated with merit goods

Choice of policy + however
Counter argument + however

Answer 1

Choice of policy
1. Subsidise.
However - expensive + opportunity cost
2. Information campaign
However - expensive + labelling adds to business costs + ineffective
3. Regulation
However - removes freedom of choice + nanny state

Counter argument
1. Response inelastic
However - still worth it for protection of our future planet
2. Consumers ignore labels
However - depends on how campaign is designed
3. Government failure
However - if all else fails it’s a last resort

Question 2

Policies for correcting market failure associated with demerit goods

Choice of policy + however
Counter argument + however

Answer 2

Choice of policy
1. Tax
However - size of tax
2. Information campaign
However - expensive + adds to business costs
3. Regulation or banning
However - hidden economy form + no freedom of choice nanny state

Counter argument
1. Taxing response is inelastic - addiction
However - demand becomes more elastic in the long run - substitutes
2. Consumers ignore packets
However - campaigns can be signed effectively
3. Government failure
However - last resort