Year 1 micro - government failure

Question 1

how do trade pollution permits work

Answer 1

• govt will set a pollution cap
• govt issues permits to firms across the economy to match cap
• firms invest in green technology or buy spare permits in the market

Question 2

advantages of tradable pollution permits against regulation

Answer 2

• the externality will always be internalised as the firms (polluters) are paying the cost to society and they are paying in the most cost effective way
• with strict enforcement, pollution will come down to SO level
• the policy promotes long run incentive for firms to invest in green tech. those who invest will also not be affected by permit prices rising

Question 3

evaluation points for tradable pollution permits

Answer 3

• can enforcement be afforded? if not the policy won’t work
• is there sufficient technology to accurately measure emissions?
• we assume that governments have perfect information, the cap level may be too tight/too lacked, which may lead to govt failure
• unintended consequences, increased COP for firms, inflation may occur,firms may shut down or relocate to countries where policy is more relaxed
• need for international cooperation, because climate change is a global market failure. getting international cooperation is very hard

Question 4

What is state provision?

Answer 4

Direct provision of goods/services by the government free at the point of consumption

Question 5

examples of things that are provided by the state

Answer 5

• healthcare
• education

Question 6

issues with state provision

Answer 6

• excess demand is created, in the free market this wouldn’t be an issue because prices will rise to ration excess demand
• expensive, taxpayers money being used to fund, may lead to higher taxes, cuts to other areas to government spending in the economy
• assumption that govt has perfect information
• inefficient, state run organisation tend to be inefficient as they do not have a profit motive, oppurtunity cost may occur

Question 7

what is information provision

Answer 7

government funded information provision/advertising/education to encourage or discourage consumption

Question 8

advantages of information provision

Answer 8

• not paternalistic or interventionist, govt isn’t forcing

Question 9

information provision on a merit good graph

Answer 9

MPB curve shifts right to MSB = MPB + advertising

Question 10

information provision on a demerit good graph

Answer 10

MPB curve shifts left to MPB + advertising = MSC

Question 11

how does information provision work

Answer 11

• demand shifts
• consumers can make rational decisions knowing the true MPB
• solves under/over consumption
• and moves us to allocative efficiency

Question 12

issues with information provision

Answer 12

• expensive, oppurtunity cost may occur
• theres no guarantee of success, up to consumers, especially if it doesn’t targe the right consumers
• likely to work in the long run, not short run, as the information needs to be absorbed by consumers for them to change habits

Question 13

what are property rights

Answer 13

• private producer owning a part of common access resources, like a forest

Question 14

advantages of owning common access resources

Answer 14

• private producer now has incentive not to exploit common access resources because if they did, the impact would be on the individual producer, eg lost income
• so negative externality will be internalised
• if enforced, will reduce quantity to socially optimum level

Question 15

issues with property rights

Answer 15

• can property rights be efficiently distributed? for air and seas, this wont work
• enforcement is expensive, if the government can’t afford policing, the scheme will break down
• equity, who gets the rights? whoever gets the right has more power