micro year 1 (part 2)

Question 1

what is a minimum price an example of

Answer 1

a price control

Question 2

what is a minimum price, when would it be used

Answer 2

• 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

Question 3

why would goverments use minimum prices

Answer 3

• to protect producers from price volatility (especially farmers, those who produce primary comoditys)
• solver markets failures (to discourage production and consumption of goods and services that do a lot of harm such as the minimum price on alcohol)

Question 4

what does price volalility mean

Answer 4

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

Question 5

Draw a full minimum price diagram and label everything

Answer 5

• 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

Question 6

what is intervention buying

Answer 6

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

Question 7

How would consumers feel about a minimum price

Answer 7

• 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

Question 8

How would producers feel about a minimum price

Answer 8

• they like it only if there is intervention buying, if there is intervention buying producers would love it, as there is a hige increase in revenue, there is an increase in producer surplus, they survive in the market, if there is price volatility and prices fall they are completely protected
• if there is not intervention buying is it ambigious as to wether they are winning or not, wether there revenues rise or not

Question 9

How would the goverment feel about a minimum price

Answer 9

• 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,)

Question 10

what is maximum price an example of

Answer 10

a price control

Question 11

what is a maximum price

Answer 11

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

Question 12

why would the goverment use a maximum price

Answer 12

to increase affordability of necessity goods and services

Question 13

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

Answer 13

• there are maximum prices on rented accomadation, called rental control
• certain goverments also put maximum prices on groceries so that people can afford them

Question 14

draw a full maximum price diagram with all parts labeled

Answer 14

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

Question 15

what would the attitude of consumers be towards a maximum price

Answer 15

• 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

Question 16

what would the attitude of producers be towards a maximum price

Answer 16

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

Question 17

What would be the goverments attitude towards a maximum price

Answer 17

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

Question 18

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

Answer 18

• 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

Question 19

How are resources distributed at a free market equilibrium

Answer 19

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

Question 20

what are private costs

Answer 20

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

Question 21

what is meant by the marginal private cost

Answer 21

the cost of production just one more unit

Question 22

what are social costs

Answer 22

private costs + external costs

Question 23

what are external costs

Answer 23

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

these can be either negative or positive

Question 24

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

Answer 24

we assume that there are no external costs or external benefits

Question 25

what are private benefits & MPB

Answer 25

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

Question 26

what are social benefits

Answer 26

private benefits + external benefits

Question 27

what are external benefits

Answer 27

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

Question 28

what things will be maximised as allocative efficency is occuring

Answer 28

• maximisation of socitey surplus (producer + consumer suprlus)
• maximisation of net social benefit
• where resources perfectly follow consumer demand

Question 29

What is society surplus

Answer 29

consumer surplus + producer surplus

Question 30

Where does maximisation of society surplus occur

Answer 30

where demand = supply

Question 31

Where does maximisation of net social benefit take place

Answer 31

• MSB = MSC
• marginal social benefit = marginal social cost

Question 32

at which point do resources perfectly follow consumer demand

Answer 32

demand = supply

Question 33

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

Answer 33

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

Question 34

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

Answer 34

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

if anyone of these break down it could be a source of market failure, which could lead to the market equilibrium not being at the allocative efficency point

Question 35

what is the social optimum

Answer 35

MSC = MSB
it is allocative efficency

Question 36

when do market failures occur

Answer 36

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

Question 37

what are positive externalites

Answer 37

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

Question 38

what are negative externalites

Answer 38

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

Question 39

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

Answer 39

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

Question 40

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

Answer 40

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

Question 41

How can public goods be a source of market failure

Answer 41

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

Question 42

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

Answer 42

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

Question 43

what is the market failure brought about by income inequality

Answer 43

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

Question 44

what is meant by equity in economics

Answer 44

fairness

Question 45

How can be monopoly power be a source of market failure

Answer 45

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

Question 46

How could factor immobility be a source of market failure

Answer 46

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

Question 47

what is negative externalities of production, what are some examples

Answer 47

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

Question 48

what is meant by third parties in economics

Answer 48

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

Question 49

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

Answer 49

MSC>MPC

Question 50

Analysis negative externalitites of production

Answer 50

• 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

Question 51

what are some examples of how consumption and explain how they could lead to the benefits of society

Answer 51

• healthcare, being vaccinated creats herd immunity so society benefits as a result of your consumption
• Education, because better/more educated individuals will be more productive, will earn higher incomes, they’ll pay more tax to the goverment and that revenue could be used to provide social desireable things such as infrastructure, hospitls, schools, welfare.
• Exersice/healthy eating, employers benefit from higher productivity of their workers, healthier people are also in work more often and so are more productive in that sense as well

Question 52

On a positive externality diagram which is higher MSB or MPB and why is this

Answer 52

MSB would be higher and this is due to the equation of SB being SB=PB + EB and if external benefit is positive than of cource social benefit is higher than private benefit as it is PB + EB

Question 53

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

Answer 53

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

Question 54

Analysis points of positive externalite

Answer 54

• individual consumers are ignoring the full social benefit of their actions and are only considering their 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 compared to what we want in society, this cullminates as a missallocation of resources, allocative inefficeny and a welfare loss/gain to be had

Question 55

what are merit goods

Answer 55

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

This is a normative consideration

Question 56

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

Answer 56

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

Question 57

what market failure can merit goods generate

Answer 57

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

Question 58

In which ways are merit goods produced and consumed and why

Answer 58

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

Question 59

what are de-merit goods

Answer 59

Goods deemed more harmful to consumers than they realise

Question 60

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

Answer 60

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

Question 61

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

Answer 61

• 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

Question 62

what characteristics do pure public goods have, explain them

Answer 62

• 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

Question 63

Why can no price be charged for a public good

Answer 63

• 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

Question 64

what problem arises due to the characteristics of pure public goods

Answer 64

The free rider problem

Question 65

What is the free rider problem

Answer 65

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

Question 66

What problems can arise from the free rider problem

Answer 66

If everybody acts as a free rider then there is not going to be anyone to contribute towards the provision of public goods and therefore their will be no private motive to supply them, the end result will be a missing market (the worse kind of market failure), there is infinate demand for the good/service but 0 supply of the good/service

Question 67

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

Answer 67

the use of quasi public goods

Question 68

What is a quasi public good, what are some examples

Answer 68

• 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

Question 69

what could be a evaluation of public goods

Answer 69

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

Question 70

what are common access resources, what are some examples

Answer 70

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 asseafood and minerals
- Air, it provides oxygen which is needed by every living animal planet

Question 71

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

Answer 71

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

Question 72

What problem can arise from common access resources

Answer 72

The tragedy of the commons

Question 73

what is the tragedy of the commons

Answer 73

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

Question 74

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

Answer 74

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

Question 75

what is goverment failure

Answer 75

when the costs of intervening outweight the benefits of intervening

Question 76

What comes about from goverment failure

Answer 76

The end result is a worsening of the allocation of scarce resources harming social welfare
^this will makes things worse if there is an a pre-existing market failure

Question 77

What would goverment failure be an arguement for

Answer 77

no goverment intervention whats so ever

Question 78

What 4 things can cause goverment failure to occur

Answer 78

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

Question 79

How could information failure lead to goverment failure

Answer 79

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

Question 80

What is the best thing to do when trying to value a externalities

Answer 80

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

Question 81

How could admin & enforcement costs being very high lead to goverment failure, what are some examples

Answer 81

The costs of the policy directly might be too extreme,

Question 82

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

Answer 82

• 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

Question 83

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

Answer 83

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

Question 84

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

Answer 84

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

Question 85

How could an indirect tax solve a market failure

Answer 85

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

Question 86

If a Tax is described as a hypothecated tax what does it mean

Answer 86

• Hypothecated taxation refers to a system of taxation in which the funds collected from a specific tax are earmarked for a specific purpose.
• The idea behind hypothecated taxation is that the proceeds from the tax will be used to fund a specific programme or service that is related to the tax.

Question 87

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

Answer 87

• 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

Question 88

what are some of the major issues with black markets

Answer 88

• 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

Question 89

How could a subsidy be used to solve market failures

Answer 89

• 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

Question 90

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

Answer 90

• 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

Question 91

What is a regulation

Answer 91

• 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

Question 92

How do regulations help to solve market failure

Answer 92

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

Question 93

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

Answer 93

• 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

Question 94

What problem are tradeable pollution permits aimed to solve

Answer 94

they battle pollution based market failure (reduce CO2 emissions)

Question 95

Why are tradable pollutions permits considered innovative

Answer 95

• 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

Question 96

What are some examples of places with a tradable pollution permits

Answer 96

The EU, south korea, UK.

Question 97

How do tradable pollutions permits work

Answer 97

• 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

Question 98

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

Answer 98

• we assume the goverment knowns the externalites of pollution, we assume they can value them correctly and thus known the socially optimum level

Question 99

Is supply of tradable pollution permits elastic or inelastic

Answer 99

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

Question 100

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

Answer 100

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

Question 101

What will occur if tradable pollution permits are enforced properly

Answer 101

Pollution will come down to a socially optimum level, allocative efficeny will be hit and we will get maximum welfare in the market

Question 102

What long-run incentives do tradable pollution permits bring about

Answer 102

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

Question 103

What are the issues with tradable pollution permits

Answer 103

• 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.

Question 104

What is state provision

Answer 104

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

Question 105

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

Answer 105

• 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

Question 106

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

Answer 106

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

Question 107

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

Answer 107

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

Question 108

What benefits come about due to state provision being used

Answer 108

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

Question 109

Is the supply curve for state provisions price elastic or inelastic

Answer 109

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

Question 110

What are the issues with state provision

Answer 110

• 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

Question 111

What are some analysis points about the issues of state provisions

Answer 111

• 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

Question 112

What market failure is solved by minimum price

Answer 112

De-merit goods

Question 113

How does minimum price solve market failure

Answer 113

• 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

Question 114

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

Answer 114

• 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

Question 115

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

Answer 115

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

Question 116

How do max prices solve market failure

Answer 116

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

Question 117

By imposing a maximum price what are we promoting

Answer 117

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

Question 118

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

Answer 118

• 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

Question 119

What evalutation could be made about the max price

Answer 119

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

Question 120

What is information provision

Answer 120

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

Question 121

what market failures are the aim of information provision

Answer 121

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

Question 122

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

Answer 122

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

Question 124

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

Answer 124

• 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

Question 125

How does information provision work to solve market failures

Answer 125

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

Question 126

what is meant by command and control approach in terms of regulations

Answer 126

• the commands are the rules and the laws such as bans, limits (such as age limits or time limits), caps (such as emmission caps or caps on the number of fish fisherman can catch), compulsory regulations (such as compulsary graphic imagery on cigerette packets), innovative regulations (such as the deposit recycling scheme in the uk, where we pay a little extra when buying plastic bottles and the such and we get it back as we recycle it)
• if there isnt a control aspect on regulations then it wont work, there needs to be strong enforcement otherwise no one will follow it as they know no one will check it, ther also has to be effective punishment (such as bad publicity or a jail term) to make sure there is an incentive to follow regulations