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
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
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
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
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.
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.
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)
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
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
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