Market Failure

Question 1

How does market failure happen

Answer 1

Overproduction
Underproduction
Underconsumption
Overconsumption

Question 2

Forms of regulation

Answer 2

Bans
Limits
Caps
Compulsory(images of cigarette)

Question 3

Regulation can

Answer 3

Incentive change in behaviour
Solve issues in free market
Achieve allocative efficiency and well fair gain

Question 4

Cons of regulation

Answer 4

The cost to implement and monitor ,
Firms may leave market
Creates a black market

Question 5

Regulation can

Answer 5

Incentive change in behaviour
Solve issues in free market
Achieve allocative efficiency and well fair gain

Question 6

How to fix pollution market failure

Answer 6

Tradable pollution permits

Question 7

What level should pollution caps be set at

Answer 7

The social optimum amount, allocative efficiency

Question 8

Benifits of tradable pollution permits

Answer 8

Firms can choose ,to pollute and pay
The firm pays for the cost on society,
Firms get to pay for the most effective choice .either invest in green energy production or buy permit

Question 10

Long run incentive to produce at the pollution level allocative efficiency

Answer 10

long run ,supply of permits reduce (shift left)-(further gov intervention )
Prices rise , therefore firms switch to green production therefore welfare gain

Question 11

Cons of tradable pollution permits/pollution caps

Answer 11

Can the economy afford to enforce it
(Especially developing economies)

Governments have imperfect information about market (set pollution cap to tight or loose)

Inflationary burden on consumers if firm raise prices

Needs global enforcement because pollution is a global market failure

Question 12

What can also happen in a pollution based market failure

Answer 12

Free rider problem - countries don’t set pollution caps because other countries will take on the burden