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05 Market Failure (Lack of Public Goods (Free Rider Problem (Non…

- - - - Not produced by private firms as it is impossible to cover costs
        
        Market fails to allocate resources to production of public goods
  - - - Disadvantages
        
        Hard to estimate amount required without price
        
        Opportunity cost
- - - - Government regulations
        
        Disadvantages
        
        Lack of information on damage of production
        activities and how much to restrict
        
        Opportunity costs from
        government spending on enforcement,
        monitoring, advertising
        
        Inefficient as unable to
        differentiate between firms
        with higher or lower costs
        
        Advantages
        
        Simpler to implement than
        market-based policies
        
        Force polluting firms to
        lower emission levels
      - Market-based policies
        
        Taxes
        
        Disadvantages
        
        Regressive
        
        Cannot limit amount
        of emissions
        
        Advantages
        
        Easier to implement than
        tradable permits
        
        Tradable permits
        
        Korea:
        Emissions Trading Scheme
        launched in 2015; reduce GHG
        by 30% by 2020
        
        Advantages
        
        Internalise external costs by
        making consumers pay for
        external costs
        
        Price incentive for producers
        to switch to less polluting resources/
        more environmentally-friendly methods
        
        Efficient
        
        Firms able to reduce emissions at lower costs
        → pay less tax
        
        Firms facing high costs in reducing emissions
        → pay more tax
        
        Emissions reduced at lower overall cost to society
        
        Disadvantages
        
        Hard to estimate external costs
        
        Hard to enforce
  - - - Market-based policies
        
        Indirect Taxes
        
        Advantages
        
        Internalise external costs by
        making consumers pay for
        external costs
        
        Increased government revenue
        
        Price incentive for consumers
        to reduce consumption
        
        Disadvantages
        
        Hard to estimate external costs
        
        Ineffective for goods with
        inelastic demand
        
        Regressive
        
        Singapore:
        $88 excise tax on alcohol,
        depending on percentage of alcohol
      - Command approaches
        
        Legislations
        
        Advertising
        
        Disadvantages
        
        Opportunity costs incurred from
        government spending on advertising
        
        Advantages
        
        Administratively simpler to
        implement than taxes
- - - - Direct Provision
      - Subsidies
  - - - Direct Provision
        
        Advantages
        
        Lower price of the goods
        for consumers
        
        Disadvantages
        
        Rely on government
        revenue
        
        Opportunity costs involved as
        government unable to use tax revenue
        to subsidise other goods
        
        Difficult to measure size of external benefits
      - Subsidies
      - Legislation/
        Advertising
        
        Disadvantages
        
        Only effective in
        certain cases
        
        Eg. Legislation requiring schooling up to a minimum age
        
        Raise the price of the good
        for consumers
- - - - Advantages
        
        Ease of implementation
        
        Easily applicable to all firms
        
        Less monitoring required compared to tradable permits
        
        Not corruptible
        
        Firms cannot monopolise taxes compared to tradable permits
        
        Politicians cannot be biased to certain firms
      - Internalises external costs
      - Disadvantages
        
        Only creates incentive for firms to reduce pollution
        
        Lower pollution levels at lower average cost
        
        Cannot fix total amount of permissible emissions
        
        Fluctuating prices as they
        are decided by market forces