Efficiency

1. Productive Efficiency: resources being utilised at full capacity and potential; society cnot produce one more good without reducing that of another

• All pts on PPC are productive efficient

2. Allocative Efficiency: resources are allocated to production of a mix of G&S that maximises societal welfare

• A single pt on the PPC, MSB = MSC
• Consr surplus: Difference between total amt that conrs are W and A to pay for a G&S and the total amt they actually pay (i.e. top half triangle of eqm)
• Prodr surplus: Different between total amt that prodrs are willing and able to sell for a G/S and the total amount they actly receive (bottom half)
  

Externality Framework

1. "Positive externalities are positive spillover effects of C/Pn on persons other than conrs or prodrs themselves. The 3rd parties do not pay to enjoy the external benefits."
2. Give example of a mkt (Healthcare, Education, etc.). Explain MPB in context.
3. Explain MEB and 3rd party in context
4. "Due to presence of MEB, MSB > MPB"
5. "Assuming no negative externalities," Draw diagram
6. "In an unregulated mkt, mkt o/p is at Qm where MPB = MPC as individuals only take into acc their priv. benefits and costs when C/P."
   7. "However, socially opt. o/p level occurs at Qs, where MSB = MSC and societal welfare is maximised."
   8. "As Qm<Qs, there is underC/P of XX, leading to a deadweight loss to society of area ABC"

Limitations

• Difficult to estimate level of MEB, over/underestimation leads to over/underCn
• High govt spending leads to strain on govt budget, may lead to higher taxes or reduced spending in needy areas; having adverse effects on nation
• Legislation requires administrative costs in monitoring. If these costs>benefits, not economically viable
• Moral suasion: effectiveness not guaranteed (passive method)
  NOTE
• Govt-financed heatlhcare by govt. can lead to moral hazard!
• One person takes up more risks bc the cost is borne by govt., hence less less incentive to take good care of own health
• Can also say lead to over con. of healthcare due to not having to pay, hence large burden on govt.
• But can go the other way round: may incentivise ppl to do more health checkups, cause they don't have to pay

Limitations

1. Administrative cost of collecting tax + Unable to estimate amt of tax to impose; furthermore problem may stem from overseas e.g. Indonesian slash-and-burn farmers and haze in SG

• Difficult to charge each firm its own tax rate since each firm pollutes at different levels
• Not gd as different industries face more difficulties in reducing pollutants. Hence should adopt c and t

2. Good, as firms that sell their permits can reduce emissions at a lower cost (bc they receive payment for their permit)

• Encourages firms to invest in reducing pollution
• Further govt intervention not needed; permits are managed by DD and SS forces
• But difficult to estimate no. of permits issued; diff to measure amt of carbon emitted
• Volatility in permit Px may discourage green investment as ppl uncertain whether future payoff will justify the adoption of green tech.
• Volatility in permit Px may occur if it's oligo, larger firms may buy up a large no. of permits, pushing up permit price to drive competitors out; in such case tax may be better bc all firms must pay regardless of mkt power

3. Administrative costs in monitoring + no incentives for firms to lower their external costs

• Does not allow reduction in pollution to be achieved at min. cost as diff firms have diff costs of reducing pollution

4. Govt. may not have adequate resources and expertise to produce the G&S

• Removal of profit incentives makes firms less conscious of reducing COP and less willing to innovate

5. No guarantee of success of campaigns; LT and passive
   EV

• Depends on type of cty
• 1st world cty w/ extensive research system has no problem determining the correct amt of tax
• Furthermore, taxes make use of self-adjusting Px mechanism to allocate resources, which is less disruptive to econ. than legislation/nationalisation which are blunt tools
• Moral suasion is LT
• Hence tax is good bc more immediate effect and uses mkt mechanism
  More EV
• Tax on nec. like electricity not eff. bc PED<1, power plants and firms need them, few close subs
• Since PED<1, firms can easily pass on increase in COP to conrs as higher el. bills
• As Qdd will not fall substantially
• Hence govt has to impose v high tax to yield the desired fall in Qdd
• Which may affect the industry's COP, Px competitiveness and X comp.
• Furthermore inequity for low Y

Merit Goods

• Good that is deemed desirable by the govt and perceived to be under-consumed
• Undercon. because individs. underestimate the private benefits and disregard +ve ext.
• e.g. Immunisation; brings MPB and MEB but some fail to appreciate them due to ignorance or complex info
  e.g. Healthcare, Education

Cause 4: Government Failure

• When govt interventions fail to correct MF
• Bc govt possess imperfect information due to lack of info on information about C, B or effects
• e.g. unable to measure external benefits of education accurately
• Don't know what level of subsidies to provide, over/undersubsidise education

SOLUTIONS

• Provide more info for conrs to make more informed decisions
• Less ignorant abt health consequences
• Public education campaigns, TV shows e.g. HPB raise public awareness of healthier fud choices and reading fud labels
  BUT
• moral suasion through such means is passive, no guarantee of success (contingent on conr's response)

Pdr > Conr: Used cars

• Pdr know more abt qly of pdt than conrs
• Used car dealers have more info than buyers regarding condition of cars
• To profit(their benefit), they have incentive to withhold info. abt the condition of cars
• Buyers cannot distinguish between high and low qly cars, only willing to offer avg P for used cars bc they may be buying a low qly car
• At this Px, sellers w/ high qly cars unwilling to offer their cars for sale
• Mkt adversely selects against high qly cars in favour of low qly
• Uninformed party, the buyers, have to choose from an adverse selection of cars
• Presence of low qly cars in this selection means buyers will further lower Px offered
• Subsequently reduces no. of high qly cars put up for sale
• Extreme case: No high-qly cars put up for sale
• MF bc asym. info led to "thin mkt", some high qly cars sold but less than if there were perfect info
• MF bc less than optimal no. of good qly cars sold
  Same can be applied for healthcare mkt:
• doc have more knowledge abt medical procedure than patient, withhold to earn more profit and make patient undergo more procedure than necessary; misperceived MPB, overcon

Conr > Prodr: Health Insurance

• Conr knows more about their own family history, risks and insurance needs than insurance company
• High risk conr have incentive to withhold info so company will agree to insure them
• Sellers cannot disinguish between high and low risk, hence they offer an avg Px as they may be getting high risk indiv.
• At this px, low-risk not willing to purchase although high risk willing to
• Mkt adversely selects against low, in favour of
  high
• Presence of high-risk indiv in the mkt forces insurance comapny to raise avg price
• Further reduces no. of low-risk conr willing to purchase
• Extreme: no low-risk willing to buy
• MF as less than optimal no. of low-risk buying insurance
  
  

SOLUTIONS
1. Govt intervention to reduce Info Gap
A. Forcing sellers disclose info abt the pdt: e.g in mkts for used cars, financial services etc., sellers are legally obligated to explain benefits, risks and charges to the buyers
Statutory guidelines that require sellers provide clear and understandable info e.g. Agri-Food and Veterinary Authority of SG (AVA) legislate all pre-packed fd pdts be labelled w ingredients, content and source. -Explain reduce info gap, less MF-
B. Protection for Conrs: against defective goods (Lemon Law): if fail to meet standards of qly, sellers required to repair/refund w/in 6 mths
C. MoneySense; national financial literacy programme to help conrs better understand financial, insurance and investment pdts to make informed decisions
Range of govt policies recommended to complement each other
2. Pdr/Conrs driven by self interest to reduce MF(uninformed take action to be more informed)

• Car buyers will try to obtain more info abt qly by engaging their own trusted mechanic/ going online to research (sgcarmart.com). This saves time and effort in gathering info, helps them distinguish betwn lemon and plum
• Car dealers use "signalling" to give info abt qly of their car to conr (thru ''moneyback" guarantees/warranties); attract them to offer higher Px. Encourages high-qly cars to be sold rather than adversely selected against
• Insurance company require conrs for full body checkup/punishment for not disclosing health truthfully, prevents sellers from choosing from ad selection of high risk
• Insurance company provide group coverage for employees of an org; get broader base of conrs w/ mix of high and low; prevents ad selection + increased cost of insuring

LIMITATIONS

• Cost of laws: enforcement, administration in ensuring the labels are accurate and checking that firms comply
• Failure of public education by moral suasion
• Government failure; time lags from red tape and bureaucracy may lead to greater inefficiency and DWL. Info from govt may also have gaps