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George's Econ > micro year 1 (part 2) > Flashcards

micro year 1 (part 2) Flashcards

1
Q

what is a minimum price an example of

A

a price control

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2
Q

what is a minimum price, when would it be used

A
  • a fixed price enacted by the goverment usually set above the equilibrium market price
  • legally it is the lowest price that can exists in the market after implementation
  • used if the price in the market is to low for any reason
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3
Q

why would goverments use minimum prices

general

A
  • protect producers from price volatility
  • solver markets failures
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4
Q

what does price volalility mean

A

The term “price volatility” is used to describe price fluctuations of a commodity

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5
Q

Draw a full minimum price diagram and label everything

A
  • price: has increased from p1 to p min
  • quantity demanded: decreased from Q1 to Qd
  • quantity supplied: increased from Q1 to Qs
  • excess supply: Qd, Qs
  • cost of intervention buying: Qd, Qs, b, c
  • producer revenue with intervention buying: Pmin, c, Qs
  • prodcuer revenue without intervention buying: Pmin, b, Qd
  • deadweight welfare loss: a, b, d
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6
Q

what is intervention buying

A

when the goverment comes and buys up the excess supply of goods brought about by a minimun price

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7
Q

How would consumers feel about a minimum price

A
  • they would not like it, because they are paying higher prices, there consumer surplus is being eroded, quantity is lower, choice is lower, if your a low income house hold affordability is lower, they have a regressive effect, over the long term consumers suffer because they have to bare the cost of intervention buying (taxes will be higher, they could be cuts to other areas of goverment spending, the goverment could be borrowing money and thus paying debt intrest on that borrowing which has a large oppurtunity cost), theres an overall oppurtunity cost of intervention buying
  • you could argue that consumers like the fact that industires are surviving
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8
Q

How would producers feel about a minimum price

A

if intervention buying occurs good
can be gains in revenue
depends on PED of good
gains of producer surplus

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9
Q

How would the goverment feel about a minimum price

A
  • in theory they would like minimum prices if there core goals are being reached, but they would be concerned about the impact on consumers, they would be concerened about unintended consequences such as black markets forming, they would also be concerened about intervention buying costs, they are baring the excess supply (are they gonna store it,costly , are they gonna destory it,waste, they may dump it for low prices to overseas,not allowed to do,)
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10
Q

what is maximum price an example of

A

a price control

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11
Q

what is a maximum price

A
  • A fixed price (price ceiling) enacted by the goverment usually set below the equilibrium market price
  • legally prices cannot go above it
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12
Q

why would the goverment use a maximum price

A

to increase affordability of necessity goods and services

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13
Q

What are some examples of where maximum prices are used in the real world

A

rented accomadation
groceris
public transport

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14
Q

draw a full maximum price diagram with all parts labeled

A

price: falls from P1 to Pmax
quantity demanded: goes from Q1 to Qd
quantity supplied: goes from Q1 to Qs
Excess demand: Qd, Qs
Producer revenue: goes from P1, a, Q1 to Pmax, b, Qs
Deadweight welfare loss: a, b, d

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15
Q

what would the attitude of consumers be towards a maximum price

A
  • They would like it as long as they can access the market, as they are benefiting from lower prices, they are seeing greater affordability, their consumer surplus is rising, their welfare is rising
  • But there is a large amount of consumers that are not able to enter the market at all (they fall into the excess demand)
    ^ this could lead to them source alternative supply, for example smuggling or sourcing the black market or they queue for a long time, are on massive waiting lists
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16
Q

what would the attitude of producers be towards a maximum price

A

they would not like it, as there is a fall in producer revenue, there is a fall in producer surplus, a lot of producers would be leaving the market or providing something else that does not fall under the regulation, could lead to a decrease in their living standards

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17
Q

What would be the goverments attitude towards a maximum price

A

They would like it if it achieves there key goals, but they would be concerned about the impact on producers and there leaving of the market and they would be concered about the excess demand and what it means for consumers, they would also not like the unintended consequences of black markets forming, the goverment would also be concered about the deadweight welfare loss

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18
Q

How could goverments intervein in a market with a maximum price in order to reduce the negatives

A
  • they could subsidies private firms to shift supply so that is equals demand
  • they could also provide there own good/service to increase supply to Qd

but with these’s come a huge oppurtinity cost to correct an issue the goverment has created

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19
Q

How are resources distributed at a free market equilibrium

A

at a free market equilibrium there is an efficent allocation of scare resources

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20
Q

what are private costs

A

a producers cost of production (gas, electricty, wages)

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21
Q

what is meant by the marginal private cost

A

the cost to firms of producting just one more unit of G/S

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22
Q

what are social costs

A

private costs + external costs

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23
Q

what are external costs

A

any impacrs on third partys that are not involved in the transaction

these can be either negative or positive

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24
Q

what do we assume about social costs and social benefits in a free market that is allocatively efficent

A

we assume that there are no external costs or external benefits

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25
Q

what are private benefits & MPB

A

individual consumer benefit upon consumption of a good/service

marginal private benefits are the benefit that a consumer gets upon consumption of just another one unit

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26
Q

what are external benefits

A

any impact on third partys as a result of consumption
this impact could be positive or negative

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27
Q

what things will be maximised as allocative efficency is occuring

A
  • maximisation of socitey surplus (producer + consumer suprlus)
  • maximisation of net social benefit
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28
Q

What is society surplus

A

consumer surplus + producer surplus

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29
Q

Where does maximisation of society surplus occur

A

where demand = supply

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30
Q

Where does maximisation of net social benefit take place

A
  • MSB = MSC
  • marginal social benefit = marginal social cost
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31
Q

at which point do resources perfectly follow consumer demand

A

demand = supply

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32
Q

where would you find the private optimum and what is it also referred to

A
  • MPC (S) = MPB (D)
  • marginal pirvate cost = marginal private benefit
  • also called market equilibrium
  • ^allocative efficency
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33
Q

what assumptions needs to be made about a free market equilibrium for there to be allocative efficency

A
  • many buyers and sellers
  • perfect information (for both producers and consumers)
  • no barriers to entry/exit
  • firms are profit maximisers
  • consumers are utility maximisers

same as perfectly competative

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34
Q

what is the social optimum

A

MSC = MSB
it is allocative efficency

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35
Q

when do market failures occur

A

when the free market fails to allocate scare resources at the socially optimum level of output

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36
Q

what are positive externalites

A

postive impacts on third partys due to the action of a seperate agent consuming a good/service

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37
Q

what are negative externalites

A

costs to third parties as a result of the actions of a seperate agent producing a good/service

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38
Q

How can positive and negative externalites be a source of market failure, and how

A

consumers will ignore impacts on third partys when they consume, firms will ignore any impacts on third parties when they produce because firms are profit maximisers that only consider their private costs, consumers are utility maximisers that only consider their private benefit

self intrest is at the heart of the problem which is why is it a market failure

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39
Q

How can merit and de-merit goods be a source of market failure

A

we dont fully know how good or bad these goods are
there is inperfect information/infomation failure which could make consumers make irrational decisions
this could lead to the allocation of scare resources being to high or to low

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40
Q

How can public goods be a source of market failure

A

the market failure is the free rider problem and the notion that firms are profit motivated and so there will be no public goods left in the long term

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41
Q

how can common access resources (tradegy of the commons) be a source of market failure

A

the market failure is self-intrest, this is brought about because common access resources will often be over-produced and over-consumed, producers will ignore external costs when producing

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42
Q

what is the market failure brought about by income inequality

A

inequity is the market failure that could be brought about by income inequality, this is down to opinion on when income inequality becomes to high

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43
Q

what is meant by equity in economics

A

fairness

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44
Q

How can be monopoly power be a source of market failure

A
  • would be one dominant seller & high barriers to entry, low variety
  • consumers can be exploited by high prices and low quantites
  • allocative inefficency
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45
Q

How could factor immobility be a source of market failure

A

if there is an increase in demand, suppliers would want to respond by producing extra output, producers wont be able to produce extra output if factors of production are immobile, this would cause a misallocation of resources

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46
Q

what is negative externalities of production, what are some examples

A

costs to third partys as a of the actions of a producers
air pollution, resource depletion, resource degradation, deforestation, desertification

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47
Q

what is meant by third parties in economics

A

individuals or economic agents who have got nothing to do with the activity/transaction taking place

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48
Q

On a diagram how do we show the impact of negative externalitites of production

A

MSC>MPC

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49
Q

Analysis negative externalitites of production

A
  • firms are ignoring the full social cost because of self intrest, they only consider private costs, as a result the marker does not allocate resources at the SOP. The end result is a overproduction
  • they often put their prices to low, only accounting for the private cost and not both private and external costs
  • As an end result we see a missallocation of resources culminating in a welfare loss
50
Q

why is there a welfare loss/welfare gain to be had on positive externality diagrams when we do not produce at the socially optimum point

A

Because social benefit is higher than social cost and so if you are not producing at the socially optimum point then you are missing out on potential extra social benefit

51
Q

Analysis points of positive externalite

A
  • consumers ignore full social benefit of their actions only considering private benefits because of self intrest.
  • as a result the market allocates scare resources at the private optimum which means their is an under consumption of and under production of goods compared to SOP
  • this cullminates as a missallocation of resources, allocative inefficeny and a welfare loss/gain to be had
52
Q

what are merit goods

A

goods that are deemed to be more benefical to consumers than they realise

This is a normative consideration

53
Q

what market failure causes merit goods and how does it do so

A

imperfect information
- there could be information failure, the information is just not present at all, the information is not clear, maybe consumers are choosing to ignore information
- maybe theres asymmetric information, the information does exist but is not shared equally between 2 parties

54
Q

what market failure can merit goods generate

A

Positive externalitys in consumption, such as healthcare, education, healthy eating and exersice,

55
Q

In which ways are merit goods produced and consumed and why

A

they are both under consumed and produced, they are under consumed because irrational desicions are being made by consumers to do so because they may lack the information

56
Q

what are de-merit goods

A

Goods deemed more harmful to consumers than they realise

57
Q

what market failure causes de-merit goods and how does it do so

A

It is due to information gaps
- information failure, information is perhaps not present, clear or perhaps is being ignored
- asymmetric information, especially the case with de-merit goods such as producers having have information but are choosing not to share it perfectly with consumers, this also links to self intrest

58
Q

What is a market failure that can arise from de-merit goods

A
  • negative externalites of consumption, such as cigerettes, alcohol, gambling, consumers may make irrational desicions to over consume, this all leads to de-merit goods being over produced and consumed
59
Q

what characteristics do pure public goods have, explain them

A
  • non-excludable: no price can be charged for a public good, that excludes others that haven’t paid
  • non-rivalrous: The quantity of goods does not diminish upon consumption
60
Q

Why can no price be charged for a public good

A
  • The benefits of consuming the good cannot be confined just to the individual that has paid
  • There might not be a cost efficenty was of pricing the good
61
Q

what problem arises due to the characteristics of pure public goods

A

The free rider problem

62
Q

What is the free rider problem

A

this is where individuals have the incentive to not contribute anything towards the provision of the public good because they will wait for others to contribute and then free ride off their contribution

63
Q

What problems can arise from the free rider problem

A
  • freeriders don’t contrubite towards provision of public good
    ^will result in missing market (market failure)
64
Q

What can be done to solve the issues brought about by public goods

A

the use of quasi public goods

65
Q

What is a quasi public good, what are some examples

A
  • sometimes shows characteristics of pure public goods but sometimes show characteristics of private goods
  • roads can be excludable such as toll roads.
  • Roads can also be rivalrous such as when congested
  • Beaches can be excludable such as private beaches owned by hotels, access is only provided for those who have paid.
  • Beaches can be rivalrous, if conjested for example
66
Q

what could be a evaluation of public goods

A
  • better tech could mean easier ways to price public goods making them excludable, maybe rivalrous
67
Q

what are common access resources, what are some examples

A

Natural resources over which no private ownership has been established
- forests, they provide natural resources such as timber and pulp
- seas, they provide natural resources such as seafood and minerals
- Air, it provides oxygen which is needed by every living animal

68
Q

in the free market why would no private ownership be established over common access resources

A

Because it is so costly and inefficent to find ways to exclude other producers from accessing those resources

69
Q

What problem can arise from common access resources

A

The tragedy of the commons

70
Q

what is the tragedy of the commons

A
  • when individuals acting in self intrest, exploit common access resources
    ^in long run depletion of resources
71
Q

what are the market failures that can arise from the tragedy of the commons

A
  • self intrest
    ^only those who stop exploiting common access resources lose out
  • resource depletion
    ^key source of income will be lost to future generations
72
Q

what is goverment failure

A

when the costs of intervening outweight the benefits of intervening

73
Q

What comes about from goverment failure

A

exacerbation of market failure

74
Q

What would goverment failure be an arguement for

A

no goverment intervention whats so ever

75
Q

What 4 things can cause goverment failure to occur

A
  • Information failure
  • regulatory capture
  • Admin & enforcement costs very high
  • unintended consequences
76
Q

How could information failure lead to goverment failure

A

goverments, politicains, policy makers will not necessarily have perfect information (they are not experts), this is especially the case when valuing externatilites, if they canno tbe valued properly policys could be too extreme or too laxs

77
Q

what is almost always the best way of dealing with externalities

A

Internalise the externality, it is being accounted for in price, this makes sure their quantity is at socially optimum level

78
Q

How could admin & enforcement costs being very high lead to goverment failure

A

The costs of the policy directly might be too extreme and lead to multiple negative effects

79
Q

What are some examples of things that could have very high admin and enforcement costs

A
  • subsidies, the monetary value of the subsidy is high, if it doesnt work goverment failure
  • regulations, if the goverment could not enforce it properly then the costs would heavily outweight the benefits because people know they can go against the regulations and not get caught
  • state provison, the monetary value is high, if it does not work goverment failure
  • price controls, often huge costs involved in enforceing (price controls are actually getting adheard to), but their is also costs in solving the problems price controls cause
80
Q

How could unintended consequences lead to goverment failure, what are some examples

A

this can occur when people over look things
- black markets, this can come about from taxations, regulation and minimum prices
- impact on firms, this can come about by over strict regulations and taxations, they could shut down, decrease in size or relocate
- impact on consumers, this can come about by regressive taxations and minimum prices
- employment, the impacts on firms could lead to unemployment

subsidies could also cause goverment failure, if the firm becomes depend

81
Q

How can regulatory capture lead to goverment failure, what are some examples

A

This occurs when goverments try to regulate monopoly power, regulatory capture occurs when the intrest of society are over looked for the intrest of CEO, managers and firms in the industry, it occurs when CEO’s and managers influence the regulator

82
Q

How could an indirect tax solve a market failure

A

it increases cost of production, which could result in the price increases (the externalite is internalised), for negative externalities is solves the problems with over consumption/production, as an end result it promotes allocative efficency and generates goverment revenue

83
Q

define hypothecated tax

A
  • revenue raised from tax is marked to be spent on specific programmes/service related to the tax

tax on fuel used to fund maintaining roads

84
Q

what are the issues with using indirect taxation to solve market failures

A
  • if there is price inelastic demand, for an indirect tax to work there must be a more price elastic demand as there needs to be responsiveness to the increase in price, if there isn’t such as when pirce is demand inelastic the reduction in consumption would not be enought to solve the market failure
  • setting the tax at the right level, if they over tax there is an almost guaranteded black market that will form, firms will also be heavily burdened and some may shut down or leave the country, if they under tax they would not internalise the externality perfectly
  • If you over tax it could become very regressive
  • indirect taxes are rather paternalistic (making decisions for other people rather than letting them take responsibility for their own lives), this is a problem because it infridges on individual freedom, liberity and choice, this is a especially big issue if we believe that the market failure is not that big of an issue
85
Q

what are some of the major issues with black markets

A
  • quality of G/S maybe questionable
    ^de-merit good could became even mor de-merit (makes market failure worse)
  • Black markets need policing, comes with cost
  • goverments lose tax revenue if there is black market
  • perhaps regressive as poor tend to use it more and exessive profittering may occur
86
Q

How could a subsidy be used to solve market failures

A
  • solves under consumption/produced market failures, positive externalites, merit goods
  • lower cost of production = lower prices and higher quantites
  • improves allocative efficency and welfare gain
87
Q

What problems arise when trying to use subsidys to solve market failures

A
  • cost, they are very costly (oppurtunity cost), if this money was borrowed it could lead to future tax rises that normally are regressive in nature, could also lead to spending cuts in the future (there is an oppurtunity cost here), spending cuts are also likely to burden the poor, debt intrest may also have to be paid (oppurtunity cost), a subsidy needs to go to every firm in the industry which increases the cost massively
  • setting subsidys as the right level, goverments are likely to over or under subsidies, if you over subsidies the cost argument comes into play,
  • How will firms use the subsidy, will they become dependent on it, they could become less efficent and allow cost to increase knowing the subsidy will cover it, they could pay off debts, they could increase salaries for their workers, they could save the subsidy, they could pay their shareholders greater dividends
  • Price elastic demand, for a subsidy to work there needs to be price elastic demand to allow for a greater increase in quantity in the market in order for it to solve the market failure
88
Q

What is a regulation

A
  • Rule/law enacted by goverment
    ^encourages a change in behaviour
    ^followed by economic agents
  • non market based approach to solving a market failure
  • command and control approach
88
Q

How do regulations help to solve market failure

A

there is an incentive to change behaviour, which inturn would solve issues within the free market without working through the free market, as an end result we get allocative efficency and a welfare gain

89
Q

What are some issues that arise when using regulations to try and solve market failures

A
  • if command or control break down the regulation is not going to work
  • regulation is costly, there is an admin cost (drawing up the regulations, enacting the regulation), there is also heavy enforcement cost as it needs policing
  • is the command going to be set at the right level, could be to strict and lead to many unintended consequences especially burdening firms (such as increasing costs significantly for firms, it could reduce profitablity so much for firms that firms may leave the country, it could decrease production which could lead to unemployment), it could lead to firms trying to cheat the system (goverment failure), if regulations are strict on consumers it could lead to them switching to alternatives such as black markets, if the regulation is set to lax their is no incentive to follow it
  • equity, it could impact some firms much more than others
  • It has a paternalistic nature, there is a lack of freedom, choice and liberty
90
Q

What problem are tradeable pollution permits aimed to solve

A

they battle pollution based market failure (reduce CO2 emissions)

91
Q

Why are tradable pollutions permits considered innovative

A
  • elements of regulation in policy, but it is much more market-friendly
    ^over comes some major issues of blanket regulations (equity)
  • No matter choice firm goes chooses in order to reduce emissions in tradable pollution permit market it will result in reduction in emissions as externalite is internalised and the polluter pays in most efficent way
92
Q

What are some examples of places with a tradable pollution permits

A

The EU, south korea, UK.

93
Q

How do tradable pollutions permits work

A
  • Goverments set a pollution cap
    ^the amount of CO2 emissions that the economy is allowed to produce in a year
  • goverment then issues permits to firms across the economy
    ^matches the cap exactly
  • ^this creates a market for them
94
Q

What assumptions are made about the goverment when they set a emission cap

A
  • we assume the goverment knowns the externalites of pollution
  • we assume they can value them correctly
  • thus known the socially optimum level
95
Q

Is supply of tradable pollution permits elastic or inelastic

A

It is perfectly inelastic as only a set amount are produced by the govermenmt every year no matter if demand changes, it is a straight vertical line and is going to be at the socially optimum level

96
Q

What choices are available to firms in order to reduce CO2 emissions in the tradable pollution permit market, how would they decide on which option to go for

A

Firms will go with whatever option is cheapest for them
- They could invest in green technology
- They could buy up spare permits in the market

97
Q

What will occur if tradable pollution permits are enforced properly

A
  • Pollution will hit socially optimum level
  • allocative efficeny achieved
  • welfare will be maximised
98
Q

What long-run incentives do tradable pollution permits bring about

A

The long run incentive is always for firms to invest in green technology, as firms would be able to profit from the sale of spare permits, they would also not be burdened when the price of permits increase as you are not trying to buy spare permits in the market and infact you would then be able to sell your spare permits at a higher price

99
Q

What are the issues with tradable pollution permits

A
  • Enforcement, can it be afforded especially in developing countries, if it cant be enforced the policy wont work
  • Technology, if there tech that can accuratly measure emissions from firms
  • Imperfect information for goverment, Can they value externalites, do they know the social optimum (the cap level could be to tight (unintended consequences) or to lax (doesnt tackle problem) )
  • Unintended cosequences, regardless of the choice firms make it will increase cost of production for firms, this could lead to firms shutting down, leaving the county and polluting else where, they could pass on higher prices to consumers (could be cost push inflation)
  • Need for international cooperation, no point if only a 1 country takes part, to make an impact we need multiple countries to take part, developing countries wont as they dont want to burden firms, this would then lead to larger countries not taking part either.
100
Q

What is state provision

A
  • Direct provision of goods/services by the goverment - ^free at the point of consumption
  • gov takes over market completely
101
Q

Why should the goverment be careful when trying to solve merit good market failures with state provision

A
  • merit goods are under produced/consumed and state provision can fix this and produce at the social optimum given the goverment can account for all externalites
  • But there has to be more than just under consumption/production taking place (otherwise their would be state provision of gyms and healthy foods) you would also have to argue that left to the free market their would be inequity when it comes to key merit goods, for instance a price is being charged where no price should be charged, which would lead to exclusion of consumers from the market
102
Q

What are some examples of merit goods market failure where state provision is a viable policy

why wouldnt you want this left tot free market

A
  • health care
  • education
  • becomes positive externality if left to free market, people can be excluded
103
Q

How are public goods market failure viable to be fixed with state provision

A

If left to the free market then a missing market will be created and so state provision in theory is a way of fixing this

104
Q

What benefits come about due to state provision being used

A

The socially optimum level is reached within the market as well as allocative efficency, welfare is also maximised

105
Q

Is the supply curve for state provisions price elastic or inelastic

A
  • perfectly price inelastic
    ^there is fixed amount of resources allocated to market every year
    ^this is socially optimum level
106
Q

What are the issues with state provision

A
  • Excess demand is created, This always occurs when the price is 0, this could result in consumers paying the price in quality or quantity or good/service (in this way you could argue there is a role for the private sector as it takes away pressure on state provisions)
  • Cost, it is very expensive to provide an entire market
  • Goverments do not have perfect information, we ‘assume’ they know social benefit and cost, they can value externalites, that they known the social optimum and of cours they do not and so quantity is probably not going to be at social optimum
  • State run organisations tend to be highly inefficent because they lack a profit motive and so costs (of production) tend to be much higher
107
Q

What are some analysis points about the issues of state provisions

A
  • for excess demand you could argue that left in the free market this wouldnt be an issue as prices would rise to ration the demand you could also argue that there is a role for the private sector as it takes away pressure on state provisions
  • could point out long-run funding because of the cost of state provision could mean higher taxes, cuts to other areas of goverment spending, debt intrest and general oppurtunity cost
  • If the goverment supply to much to the market then pure goverment failure could occur and if its to low the excess demand could be worsened and put even more stress on the market (goverment failure risks both ways)
  • You could argue if this state provision is really the most effective use of public money especially when a lot of it is being wasted by higher costs (of production), huge oppurtunity cost and a big risk of goverment failure
108
Q

What market failure is solved by minimum price

A

De-merit goods

109
Q

How does minimum price solve market failure

A
  • The minimum price is set above the equilibrium, which contracts demand, consumption will be discouraged, quantity in the market will fall to the socially optimum level of output. By doing this the externalite will be internalised
  • By doing this the the over consumption/production issues will be solved, allocative efficency will be reached and welfare will be maximised
110
Q

What are the issues with imposing a minimum price to solve market failure

A
  • If demand is price inelastic so demand might not fall as much as we want it to so that it will reach the socially optimum point
  • Minimum price is regressive as it will burden the poor more than the rich and could further income inequality (which is a key marcoeconomic objective)
  • Consumers may turn to the black market and this is dangerous for them as the quality may be compromised, consumers may also turn to cheaper legal alcoholic drinks that are much worse for them, if consumers buy from black markets tax rev could also be lost which could harm social welfare
  • If the minimum price is set to high firms may leave the market, unemployment could occur, tax rev could be lost (goverment failure). If the minimum price is set to low the quantity would not reach the social optimum and the externatilite would not be fully internalised
111
Q

What is an evaluation of minimum price being a cost to firms

A

If demand is price inelastic then firms could see increases in revenue and would not be burdened by it

112
Q

How do max prices solve market failure

A
  • prices are made lower
    ^demands extends
    ^consumption and equity promoted
  • solve income inequailty market failure
113
Q

By imposing a maximum price what are we promoting

A

we are promiting equity, more consumption of essential goods/services

114
Q

What are some issues with using max prices to solve market failures

A
  • less supply as shortage created
    ^consumers may not benefit if can’t get G/S
  • Black markets may form
    ^consumers exploited
  • quality & quantity could suffer from lower revenue
  • enforcement of max price needed
  • max price needs to be set at right level
    ^to low means massive shortage (goverment failure)
    ^to high and equity and consumption not promoted
  • Cost to gov if need to subsidies firm/supply good themselves
115
Q

What evalutation could be made about the max price

A
  • firms could change their production to alternative good/services that do not fall under the max price, this means the supply for the max price good falls and the excess demand could be made even worse
116
Q

What is information provision

A

goverment funded information provision (advertising, education) to encourage or discourage consumption

117
Q

what market failures are the aim of information provision

A

Merit and demerit goods, as we know imperfect information is at the heart of the market failure

118
Q

How could information provision be an evalution for less market friendly policys

A
  • not very interventionist
  • not very paternalistic
  • cheaper in comparison to other policys
  • could make markets more competative as markets get closer to perfect information
119
Q

How does information provision work to solve market failures

A

1)Information is provided via advertising and education, consumers make rational decesions now knowing the true Marginal private cost/benefit
2)This results in a change in demand either left of right, which changes the quantity consumed in the market
3)This would then solve the over/under consumption in the market
4)Allocative efficency is then reached as well as the socially optimum level, welfare is maximised in the market

119
Q

What are some of the issues in using information provision to solve market failures

A
  • There is a massive cost, advertising costs and education costs (to run ads and to run things such as clinics and seminars)
  • There is no guarentee of success, even if people know the benefits/costs they could act irrationally, especially if the policy is poorly targeted and is of poor quality
  • Time lag, even if the policy does work it will be more effective over time as it takes a while for information to be absorded by consumers and for them to then change their consumption habits, it also takes time for consumers to keep repetativly seeing advertising

George's Econ (8 decks)

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