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Market Failure Solutions (Negative Externalities (Education : A long-term…
Market Failure Solutions
Negative Externalities
Education : A long-term solution to raise awareness among consumers and producers of the negative externalities present in the products through campaigns, education in schools and advertisement.
Limitations 1) Education is a long process dependent on the age, attitude and aptitude of the recipient. 2) It may be difficult to change habits and mindsets
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Total Ban on product The government can set a total ban on a product if the welfare loss is deemed to be far greater than the social benefits. This eradicates all negative externalities arising from the product. E.G Chewing gum
Limitations 1) High adminstrative cost and enforcement difficulties hinder the success of this intervention method. 2) It may work against the welfare of the society if the ban results in greater welfare loss.
Marketable Permits 1) The government can auction off marketable permits, with the number of permits decided beforehand. 2) Firms can buy and sell these permits according to their production level. 3) The higher the price of a permit, the greater the incentive for the firms to reduce pollutive emissions and other forms of negative externalities :warning:Emission Trading Scheme :warning:
Limitations 1) Government failure may occur as the government may inaccurately determine the correct number of permits to auction off. 2) There is difficulty of withdrawing the permits once issued. 3) It is difficult to determine the price of permits, as the government may end up over/under charging, which may still result in the inefficient allocation of resources. 4) High administrator costs and enforcement difficulties hinder the success of this intervention method.
Implementing taxes 1) Taxes causes producers to internalize negative externalities by increasing the cost of production so that MPC coincides with MSC. 2) Tax per unit output is equal to MEC. 3) This serves as an incentive to lower output to the socially optimal output Qs
Limitations 1) Lack of knowledge and information regarding the amount of tax per unit output to impose. Government failure may occur in the event of over/under taxing. 2) Different tax rates imposed on different firms producing different levels and types of externalities is unfeasible and inefficient. 3) High taxes on goods that have highly price-elastic demand are unpopular. 4) Administrative costs to collect taxes
Positive Externalities
The government can provide directly by either producing the goods and services themselves or by outsourcing to a private company with the objective of maximizing society's welfare.
Providing subsidies 1) Subsidies cause producers and consumers to internalize positive externalities by decreasing cost of production so that MPB shifts to coincide with MSB. 2) Amount of subsidies per unit output must be equal to MEB. 3) This serves as an incentive to produce more to the socially optimal output
Limitations 1) Lack of knowledge and information regarding the amount of subsidies to provide. Government failure :fire: may occur in the event of over/under subsidizing. 2) Subsidies increase income inequality as they may increase the producer's profits. 3) Subsidies may breed inefficiency in the long run as it reduces the incentives for firms to stay efficient by find the lowest cost of production.
Public goods
The government can provide directly by either producing the goods and services themselves or by outsourcing to a private company with the objective of maximizing society's welfare
Limitations 1) Lack of information such as actual level of public demand for the public good. 2) Electoral pressures and conflicting interests due to the pursuit of self-interest among politicians.
Imperfect Information
There are regulations that require firms to provide accurate and sufficient information of products to consumers
Education is a long-term solution to raise awareness of the negative or positive externalities to correct perceived benefits or costs.
Income inequality
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Supply side policies such as education and retraining of workers to increase value of low-wage workers
Limitations 1) Long gestation period 2) Success is dependent on the age, attitude and aptitude of the workers
Market dominance
Deregulation To subject firms to greater competition so as to keep the price more competitive and improve efficiency
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Pricing policies (price ceilings) The maximum price a firm can charge is dictated by law so that large firms are unable to charge higher prices
Limitations
1) Government failure may occur as they may not know the exact price that equals to the marginal cost due to insufficient information. They may end up over or under stating the price, leading to greater inefficiency in allocation of resources 2) With a decrease in profits, firms may be not incentivized to conduct R&D, lowering dynamic efficiency
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