Please enable JavaScript.

Coggle requires JavaScript to display documents.

Market failure (Externalities (Negative externalities (of production:…

- - - - examples: production of goods by use of fossil fuels leading to carbon emissions, hence there are external costs including pollution of clean air, rivers, lakes, etc, and negative effects on human health
    - - examples: smoking, where external costs include negative health effects on non-smokers and increased health care costs;
        use of cars using gasoline, where external costs include pollution of clean air
  - - - examples: research by private firms leads to development of new technologies that benefit the whole of society;
        training for workers provided by a firm which benefit other firms once the worker changes job
    - - examples: consumption of education leads to benefits for society including lower unemployment, increased productivity, lower crime rates, higher economic growth, similar external benefits arise from consumption of health care
- - - - ban dangerous substances
      - create protected areas forbidding industrial or agricultural activities
      - restrictions on logging, fishing and hunting
      - negative advertising to influence consumers to avoid purchasing products of highly polluting firms
      - limit the amount of output produced
      - impose restrictions on emmisions
      - force firms to install non-polluting technologies
      - Evaluation
        
        good:
        
        simpler to implement compared to market-based policies
        
        effective in at least partially achieving their objectives
        
        in some cases are more appropriate than market solutions
        
        bad:
        
        involve costs of monitoring and enforcement
        
        are inefficient, as they do not differentiate between firms with higher or lower costs of reducing pollution/ environmental harm
        
        do not provide incentives for switching to cleaner technologies
        
        face incomplete knowledge on extent of damage done by various pollutants and therefore on how much to restrict activities
    - - an indirect tax on output
      - an indirect tax on emissions: shift to clean-technologies/ carbon tax
      - tradable permits: a maximum permissible amount of a particular pollutant is determined, and permits to emit this pollutant are distributed to firms by the government, which can be bought and sold in a market. This offer the incentive to switch to clean technologies.
        
        Ex. European Union Emissions Trading System covering power and heat generation, oil refineries, metals, pulp and paper, and energy intensive industries
      - Evaluation
        
        good:
        
        can internalize the externality=make producers pay for the external cost
        
        greater efficiency in reducing pollution than government regulations
        
        the most efficient policies are taxes on emissions and tradable permits. Firms that can reduce emissions and pay a lower tax or sell permits for a profit; firms facing high costs of reducing emissions can pay the tax or buy permits. The result is a reduction of emissions at a lower overall cost to society.
        
        taxes on emissions and tradable permits create incentives to switch to clean technologies
        
        a switch to cleaner technologies causes MSC to shift to the right, reducing the size of the externality and welfare loss
        
        bad:
        
        for both taxes and tradable permits, difficulties in identifying the most harmful pollutants and the value of external costs
        
        in the case of taxes, difficulties in identifying the value of tax that will equal the value of the harm
        
        for tradable permits, there are difficulties in determining the correct amount of overall permissible pollution
        
        for both indirect taxes and tradable permits, there are difficulties in ensuring compliance and enforcement
  - - - legislation
      - negative advertising to change consumers' preference
      - education of consumers
      - Evaluation
        
        good:
        
        simple to implement compared market-based policies
        
        effective at least partially in reducing demand for the good causing the negative externality
        
        in some cases are more appropriate than market solutions
        
        bad:
        
        are very unlikely to reduce demand to the required level
        
        advertising and education of consumers have opportunity costs
        
        difficulties of compliance and enforcement and costs of ensuring that the regulations are being followed
    - - an indirect tax on the good causing the negative externality
      - Evaluation
        
        good:
        
        can internalize the externality
        
        can be more efficient because they are based on the price mechanism, using price incentives for consumers to respond to
        
        if the good being taxed has inelastic demand; see the tax will result in high tax revenues that can be used to finance government advertising and education programs
        
        bad:
        
        difficulties in measuring the value of the external costs
        
        difficulties in determining the size of the tax that will be equal to the external costs
        
        if demand for the good that is taxed is inelastic, the tax is unlikely to result in a significant fall in Q produced and consumed, and hence will not be very effective in eliminating the externality
        
        indirect taxed are regressive affecting poor people more strongly, sometimes causing them to switch to lower quality substitutes that may be more harmful
- - - - direct government provision: such as research and development for new scientific knowledge and technologies
    - - provision of subsidies
    - - good:
        
        are highly effective in increasing the amount of R&D carried out
      - bad:
        
        difficulties in estimating the value of the external benefits
        
        difficulties in determining the size of the subsidy or the funds that should be allocated toward direct provision, in order to match the value of the external benefits
        
        involve use of government funds that have opportunity costs
        
        difficulties faced by the government in determining which particular activities should be supported and by how much
        
        the government's selection process on what activities support is often subject to political pressures with choices made on political rather than economic grounds
  - - - legislation forcing increased consumption
      - advertising and education encouraging consumption
      - direct government provision
    - - provision of subsidies by the government
    - - of legislation, advertising and education
        
        good:
        
        simple to implement
        
        effective at least partially in increasing demand for the good causing the positive externality, especially in the cases of laws making education compulsory
        
        bad:
        
        advertising and education alone are unlikely to increase demand to the required level
        
        advertising and education have opportunity costs
        
        difficulties of compliance and enforcement of legislation
        
        increase in demand leads to a higher P, possibly making goods unaffordable to low-income groups
      - of direct government provision and subsidies
        
        good:
        
        are highly effective in increasing the Q supplies and consumed, and are therefore very common in correcting these externalities
        
        subsidies and/or free government provision are key factors in making these affordable to all
        
        bad:
        
        difficulties in measuring the value of the external benefits * difficulties in determining the amount of government provision and/or subsidy that will be equal to the external benefits
        
        opportunity costs of government spending on direct provision and/or subsidy
        
        difficulties faced by the government in making choices on what to support and by how much in view of the very many competing claims on the government budget
- - - - good:
        
        health and safety and quality controls protect consumers against the risks of purchasing inferior or dangerous products
      - bad:
        
        are time-consuming processes causing delays in economic activity
        
        large opportunity costs in terms of implementation and monitoring
    - - good:
        
        information about the quality of the good or service help consumers make informed purchasing decisions
      - bad:
        
        information collection is complicated and costly; may be inaccurate
        
        some information is impossible to provide to buyers
    - - good:
        
        requirement that professionals have a license
      - bad:
        
        may be used to restrict the number of professional in a market and create monopoly power
  - - - government positive response:
        
        correction of underallocation of resources to health insurances by covering everyone in a population through social health insurance, or direct government provision of health care services at a zero/low price
      - government negative response:
        
        opportunity costs of spending from the government budget or social insurance budget
    - - positive response:
        
        the problem is usually dealt with by the seller of insurance, who may force the buyer to share in the payment of damages
      - negative response:
        
        unequal effects on low-income versus high-income people