Share 2.8 Market Failure Review
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Outline THREE intervention methods available to the government to correct the market failure associated with demerit goods.
Legislations, educational campaigns, indirect taxes
Explain what is meant by the tragedy of the commons and why it causes market failure.
a situation where degradation, depletion or destruction of a common access resource is caused by rivalry and over-consumption.
Outline THREE ways in which stakeholders can address the market failure caused by the tragedy of the commons.
international agreements, legislations, cap and trade schemes, carbon taxes, indirect taxes, educational campaigns etc.
Provide a real-life example of how an indirect tax may be used to address a negative externality of consumption (Details needed please!)
E.g. 92% tax on e-cigarettes in Vermont, USA; previously only a standard sales tax which was cheaper than traditional cigs, ad valorem tax
Provide a real-life example of how a subsidy may be used to address a positive externality (Details needed please!)
China = one of 3 biggest CO2 emitters and faces pollution, Chinese EV companies (e.g. BYD, Nio, Xpeng) have received tens of billions of subsidies
Provide a real-life example of how an education campaign has been used to correct market failures.
Five-a-day campaign (5 portions of fruits + veggies), adopted by UK in early 2000s, as it reduces risk of heart disease & cancer, and intestinal benefits
Define collective self-governance and provide a real-life example of how it can be used to correct market failures.
Plastic Free Challenge to correct neg. ext. of cons. (even prod.) of using plastics; social media - inspiring selfies + images + hashtag #plasticfreechallenge
Outline TWO advantages and TWO limitations of the use of Pigouvian taxes to correct market failures.
Price incentive to reduce consumption, tax revenues vs. regressive, parallel markets, imperfect market info
Outline ONE advantage and THREE limitations of the use of legislation to correct market failures.
Command-and-control approach (forced to comply) vs. monitor & enforcement costs, time to implement, choose to break if penalties not high
Outline ONE advantage and THREE disadvantages of a Cap and Trade Scheme
flexibility + internalize externality vs. job losses, MNC shift production, hard to determine correct cap level
Draw out a cap and trade scheme. Then, draw out what would likely happen to the tradeable permits market during an economic recession.
Demand for permits decrease as demand for companies' products decrease (no need so many permits) --> price drops, quantity stays the same.
Outline TWO advantages and TWO disadvantages of a carbon tax to address market failures.
long-term incentives, internalize externality, tax revenue vs. regressive, imperfect market info
Using a graph, explain why indirect taxes may be ineffective at decreasing the quantity of a demerit good for products with inelastic PED.
Huge tax increase before you see a proportionally smaller reduction in quantity demanded (and hence quantity transacted)
Using a graph, explain why larger subsidies may be needed for merit goods that are highly price inelastic.
Need big subsidy before big drop in price before quantity demanded increases by a little
Explain why dead weight loss caused by a positive externality of production may not be fully eliminated.
New supply curve S2 will not quite be at the MSC in this case. D = MPB = MSB.
Outline TWO benefits and TWO disadvantages of subsidies as a form of intervention to address market failures.
Creates incentive + lowered prices vs. opportunity cost, difficult to calculate subsidy amount,
