Policies to solve market failures

Question 1

What are property rights

Answer 1

process of giving a private holder ownership of a common access resource (such as sea, air and land)

Question 2

Aim of using property rights

Answer 2

Private firms use the resource to maximise profits and with private ownership there will be a strong incentive to maintain the resource and not overproduce otherwise they could lose out on profit in the future.

Question 3

What can property owners do if someone intrudes on their property?

Answer 3

They can sue them for trespassing and so protecting their private property that they rightfully own. Consequently stopping overproduction issue

Question 4

Evaluation of property rights (practicality)

Answer 4

Good at promoting incentives
Difficult to assign private ownership of commons
Theoretical sound but limits in practical application
Problems of overfishing and excess pollution (eg) still exist

Question 5

What are Buffer Stock Schemes

Answer 5

A government plan to stabilise prices in volatile markets

Question 6

Are buffer stock schemes a market-based or interventionist approach

Answer 6

Interventionist

Question 7

Aim of buffer stock schemes

Answer 7

protect consumers from too high prices, protect producers from too low prices to maintain living standards

Question 8

Outline the process of Buffer stock schemes

Answer 8

Government send max and min price bands in a market
Prices too high = Governments sell stored stocks to increase supply to lower price
Prices too low = Government increase demand by buying excess stock in the market to increase price

Question 9

What does a diagram for buffer stock schemes look like?

Answer 9

Question 10

What are two types of price controls used to solve market failure

Answer 10

Minimum and maximum price

Question 11

What are minimum prices

Answer 11

Price floors set above the equilibrium price in the market to discourage consumption of demerit goods but also protect producers

Question 12

How can minimum prices protect producers

Answer 12

Producers of primary commodities which are price volatile
Minimum price provides stable income

Question 13

Minimum price diagram for demerit goods

Answer 13

Question 14

Example of when a minimum price was imposed

Answer 14

In 2018 the Scottish government announced a minimum price of 50p per unit of alcohol as a radical way of reducing the overconsumption of alcohol. In Scotland every adult on average drinks 20 units of alcohol a week, much more than the recommended level of 14.

Question 15

Was alcohol minimum price in Scotland successful?

Answer 15

It has reduced consumption by around 8%. However has not seen a noticeable change in the number of alcohol related crimes being committed

Question 16

Can a minimum price increase inequality?

Answer 16

Yes
The poor suffer proportionately greater than the rich as minimum price are regressive.
Tale a greater amount of the poor incomes, which could widen income inequality gap

Question 17

When are consumers burdened more by a minimum price?

Answer 17

If the goods demand is price inelastic due to addictive nature of demerit goods

Question 18

What are unintended consequences of a minimum price

Answer 18

Firms shut down or leave country causing unemployment
Black markets can form
Consumers switch to legal alternatives that are actually worse for them as they are cheaper
Can worsen negative externalities
Can result in government failure

Question 19

What is government failure?

Answer 19

When the costs of intervention outweigh the extra benefit, leading to a further worsening resource allocation

Question 20

What are 3 cons of minimum price

Answer 20

Increase income inequality
Can lead to unintended consequences
Setting minimum price difficulties

Question 21

Why can it be difficult to set minimum price?

Answer 21

Putting an accurate value on a negative externality is extremely complex in reality. There are ways in which it can be done but it is not always perfect. Consequence is the min price being set too low so externalities are not internalised. If min price is set too high, unintended consequences can arrive

Question 22

Cons of minimum price

Answer 22

Excess supply created which has to be bought up by government (intervention buying). What to do with the excess stock is the issue.
1. Storing is expensive
2. Destroying is wasteful
3. Dumping abroad is politically sensitive
Because of costly intervention buying of excess stock, this needs to be funded so can be followed by future tax rises which harm consumers.

Question 23

Intervention buying

Answer 23

Following government intervention of a minimum price, governments create excess supply which has to be bought up by government. Called intervention buying

Question 24

What is a maximum price

Answer 24

price ceiling set below free market equilibrium price

Question 25

What does a maximum price do

Answer 25

Creates excess demand form an extension in demand, improving the affordability of essential goods and services. Aims to reduce any underconsumption issues thus improving the allocation of resources.

Question 26

Cons of a maximum price

Answer 26

Creates a shortage/excess demand Unintended consequences (black market) Difficulty in setting max price levels

Question 27

How can a shortage be a negative consequence of a maximum price?

Answer 27

means some consumers will not be able to access the good because demand is greater than that supplied, despite lower prices due to suppliers either leaving the market or not willing to supply at such low prices Consumers receive no benefit

Question 28

Diagram of a maximum price solve income inequality

Answer 28

Question 29

Real world example of maximum pricing

Answer 29

Rent control in New York

Question 30

What is regulation

Answer 30

Regulations are rules or laws enacted by the government which economic agents have to operate within

Question 31

How can regulation solve market failure

Answer 31

Starts with a rule which intends that intends to either decrease or increase consumption or production to solve market failure without using the price mechanism

Question 32

What is a strength of regulation

Answer 32

can overcome the issues surrounding the ineffectiveness of market based approaches like subsidies and taxes, when faced with an inelastic demanded goods market

Question 33

Explain makes regulation effective

Answer 33

There is a strong incentive for consumers and producers to follow regulation as long as the control side of the policy is strong. This involves strict punishment for those who are found breaking the regulation, like fines and negative publicity, but most crucially through strong enforcement of the policy by policing. As a result the behaviours of economic agents is adjustable to where consumption or production is increased or decreased, n as part of there aims of the regulation. As a consequence quantity in the market is reallocated to the socially optimum, where there is allocative efficiency, welfare is maximised, therefore internalising the market failure.

Question 34

What are some examples of regulation

Answer 34

Setting legal smoking age of 18+ Price regulation through min or max price US Motor Vehicle Air Pollution Act National Minimum Wage

Question 35

What is the NMW as of April 2024 in UK

Answer 35

£8.60 for 18-20 year olds

Question 36

What are unintended consequences of regulation

Answer 36

Firms shutting down - unemployment Firms leaving the country - unemployment Black market creation Government failure

Question 37

evaluation of regulation (costs)

Answer 37

Extremely costly to enact Administration of drawing up regulations and getting through political process and strict enforcement If costs outweigh the benefits it leads to gov failure

Question 38

Is there an opportunity cost of regulation?

Answer 38

If there is no surplus tax revenue Argued whether regulation is the best use of tax payers money, especially if there are other appropriate policies which could be used instead.

Question 39

What happens if government cannot afford regulation

Answer 39

individuals and firms know that if they were to ignore the regulation then it is unlikely that there will be caught if regulation enforcement cannot be afforded by the government

Question 40

How could economic agents be harmed if government cannot afford regulation

Answer 40

Economic agents could be harmed with future corp and income tax rises, burdening the poor more

Question 41

What are tradable pollution permits

Answer 41

where the government gives firms a permit which allows them to produce up to a set amount of carbon each year aiming to solve pollution based market failure

Question 42

Outline process of tradable pollution permits

Answer 42

1. First Government set a maximum level (cap) of CO2 allowed to be produced. The cap is the socially optimum 2. permits are distributed out to firms 3. Market for permits is created 4. Firms make decisions on whether to invest in green technology or to buy excess permits from other firms 5. Tradable pollution permits create incentives to reduce pollution and invest in GT so that they have excess permits left over which they can then sell to increase revenues as they are in high demand by firms that struggle to invest in GT

Question 43

Diagram for tradable pollution permits

Answer 43

High demand for permits shifts demand out from D1 to D2 increasing price of permits to P2 Government tightens the cap and reduces number of permits handed out which shifts supply leftward from S1 to S2 increasing price to P3

Question 44

Cons of tradable pollution permits

Answer 44

Difficult to set at the right level Costly to enact Unintended consequences

Question 45

What is a subsidy

Answer 45

A subsidy is a money grant given to producers by the government to lower costs of production and encourage an increase in output

Question 46

When can subsidies be used to solve market failure

Answer 46

When there are positive externalities to production and consumption that create underconsumption and underproduction

Question 47

How do subsidies solve market failure when there is underconsumption

Answer 47

Gov want to maximise welfare at social optimum In free market not the case MPB considered Misallocation of resources Subsidy lowers cost of production Lower prices to consumers Due to law of demand, consumption rises Eliminates underconsumption as quantity increases Positive externality has been internalised

Question 48

Diagram of subsidy solving underconsumption

Answer 48

Question 49

How do subsidies solve market failure when there is underproduction

Answer 49

Gov want to maximise welfare at social optimum In free market not the case MPC considered Misallocation of resources Subsidy lowers cost of production Can produce more at lower cost Quantity produced increases Underconsumption eliminated Positive externality has been internalised

Question 50

Diagram of subsidy solving underproduction

Answer 50

Question 51

Evaluation points of subsidies to solve market failure

Answer 51

Subsidies are expensive to implement Risk of unintended consequences Correct level of subsidy is very difficult to set Subsiding some markets will be completely ineffective

Question 52

Unintended consequences of a subsidy

Answer 52

Firms using the subsidy for other factors other than to solve the market failure for example deleveraging, increasing the salaries of staff or using it to increase dividends to shareholders. So the market failure will persist and therefore the costs of intervention outweigh the benefits and results in government failure

Question 53

What is state provision

Answer 53

When the state provides all of the resources in a given market, free at the point of consumption, using tax payers money to fund it

Question 54

What types of market failure can state provision solve?

Answer 54

Missing market problem with the under provision of public goods The underconsumption and underproduction of merit goods, caused by information gaps

Question 55

How can state provision help the missing market problem?

Answer 55

State provision allows there to be a supply of public goods, in theory at the socially optimum level of output, where otherwise in the free market they would not be provided at all due to their being no profit incentive for suppliers Improves social welfare and solves complete market failure

Question 56

What does state provision allow?

Answer 56

Allows for universal access to public goods like education and healthcare with these service being free at the point of consumption

Question 57

Diagram showing state provision

Answer 57

Question 58

What are the 3 cons with state provision

Answer 58

Large excess demand State run organisations tend to be highly inefficient Imperfect information when it comes to setting the right level of state provision (too less leads to excess demand, and too much is not socially desirable)

Question 59

When is information provision and advertising a policy used by government?

Answer 59

To intervene in free markets that have positive and negative externalities where there is the overconsumption of demerit goods and underconsumption of merit goods.

Question 60

Notes for paragraph on information provision.

Answer 60

Talk about free market consumers Where the over or under consumption is Deadweight welfare loss A way to solve this...positive or negative information provision or advertising Consumers now fully informed of cost or benefit MPB shifts to social optimum Externality internalised No more resource misallocation Market failure solved

Question 61

Diagram of effect of positive information provision and advertising on underconsumption of merit good

Answer 61

Question 62

Diagram of effect of negative information provision and adverting on the overconsumption of demerit good

Answer 62

MPB curve shifts left to socially optimum levels at Qs from MPB to MPB+info

Question 63

What are 2 negatives of information provision and adverting

Answer 63

1. Very costly 2. No guarantee it will work as intended

Question 64

Why is information provision costly?

Answer 64

For it to be successful, needs to be well targeted and spread out to mass media outlets increases costs considerably Opportunity cost involved if there is no surplus tax revenue at the time. Can be argued to whether this is the most effect use of taxpayers money, especially ifs advertising doesn't have a noticeable impact on consumer behaviour. Money could be used for suitable regulation instead or to help maintain regulatory bodies.

Question 65

Why might information provision not work as intended?

Answer 65

If quality of information provided is poor Unclear or not well targeted at the mass consumer If not successful and with its expensive provision, this could lead to market failure Pre-existing market failure remains and results in a worsening of resource misallocation.

Question 66

RWE of Policy enacted to stop overfishing in the UK

Answer 66

The Sea Fisheries (Amendment) Regulation Set in 2023 Limit to fisherman of 3.8 tonnes per vessel per year

Question 67

Indirect tax diagram to solve overproduction negative externality

Answer 67

Question 68

Indirect tax diagram to solve overconsumption negative externality

Answer 68

Question 69

Subsidy diagram to solve underconsumption

Answer 69

Question 70

Subsidy diagram to solve underproduction

Answer 70

Question 71

Hypothecated tax

Answer 71

Indirect tax generates government tax revenue which can then be used too fund other expenditure in the economy whether that is on public service improvements like rehabilitation and addiction programs to help addiction of demerit goods or other policies to further solve market failures.

Question 72

Indirect tax suitability

Answer 72

Paternalistic policy, government assumed to have perfect information Arguments to whether it is a significant market failure Restricts freedom, choice and liberty