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Policies to Solve Market Failure, Note: diagrams should be at an…
Policies to Solve Market Failure
Indirect Taxation
Negative externality in production market failure
CofP increases for firms... MPC shifts up to MPC + tax... this internalises the externality and the price reflects the full social cost of production
Negative externality in consumption market failure
Increase CofP for firms... MPC shifts up to MPC + tax... consumption is discouraged and therefore the externality is discouraged
Evaluation
G/S that are price inelastic
Either they are necessities, addictive or have no good substitutes
Hard to know how much to tax
In reality it is hard to know the scale of the negative externalities... it can be too high or low... if too high the company may go bankrupt, or a black market could be set upt... if too lowthe negative externality won't be fully internalised
The Poor will suffer proportionally more than the rich as indirect taxes are regressive... poorer consumers are burdened more if it is demand inelastic
Subsidy and Market Failure
Positive externality in Consumption
Subsidies reduce CofP which decreases price and encourages consumption... no longer misallocation of resources... welfare is now maximised.
Positive externality in Production
Subsidy reduces CofP which decreases price and increases quantity... no longer misallocation of resources.... welfare is now maximised
Evaluation
Subsidies are very expensive to implement
All firms must be given the subsidy to prevent unfair competitive advantages... If the cost of the subsidy outweighs the gains in welfare, there will be government failure and a worsening fo the misallocation of resources
Government cannot control how the subsidy is spent by firms
Knowing the correct level of subsidy to set is extremely difficult
Inelastic Demand
Consumers may still have to pay... but just through higher taxes
Regulation and Market Failure
Non-market based approach to solving market failure... useful if the market is large or demand is inelastic
Evaluation
Expensive... regulations need to be drawn up and strict enforcement is needed to ensure they are followed
Difficult to set the regulation at the right level
Regulation may be highly unfair in its impact on different firms
Argument for De-regulating
Create competitive market
Productive efficiency
Allocative effieciency
Arguments for:
Protects consumers against abuse of monopoly power
Creates an environment that will encourage firms to strive for productive efficiency by reducing costs... cap price and they will reduce cost
Tradable Pollution Permits and Market Failure
State Provision and Market Failure
Occurs when the state provides all resources in a given market free at the point of consumption using tax payer's money to fund it
Arguments
for
SP
Under consumption and under provision of merit goods
State will provide where social welfare is maximised
Goods such as education and healthcare can be argued to not have exclusions and state will provide universal access
The missing market problem with public goods
SP allow for there to be a supply of public goods... as the market won't produce them
Greater productive efficiency
through owning an entire industry leading to large scale economies, particularly in the case of natural monopolies
Evaluation
Expensive
... therefore, substantial opportunity cost
Excess demand... because P is 0 there will be an overconsumption of Q1 - Q*
Knowing the right level is difficult
and intervention can be dangerous if it is done wrong
State run organisations tend to be highly inefficient
as they lack the profit motive that private firms have (who will be productively efficient as they will be cutting costs to max profit)... therefore they will likely be complacent and wasteful in production.
Private sector will be allocatively efficient
as market forces ensure that g+s are produces to meet the needs of the consumer... this leads to greater choice and lower prices as firms complete supernormal profits
Alternatives
Internal markets for the provision of Public sector services
e.g., Education and Health Care
Creates competition within the public sector
Providers of government services can buy and sell to other providers of government services... these providers will compete with each other to offer service internally and to the general public
Public Private Partnerships
Allows the government access to private sector finance and expertise
Information Provision and market Failure
Negative advertising / information provision
Negative advertising or information help to solve de-merit good market failure where information failure is the cause of the problem... armed with the correct information consumers will now purchase rationale at Q*
Positive advertising / information provision
Positive advertising or information helps to solve merit good market failure were information failure is the cause of the problem... armed with the correct information consumers will now purchase rationally at Q*
Evaluation
Expensive
... for advertisement to be successful it has to reach a large amount of people through a variety of platforms... this creates a large opportunity cost
No guarantee that advertising or information provision will work as intended
... if no benefit arises from the advertisement then the cost of implementing such policies outweigh the benefits... therefore government failure
This is Long Run
Price Controls and Market Failure
Minimum Price
They are price floors set
above
the equilibrium price in the market to discourge consumption of de-merit goods
Excesss supply at Qs - Q* as firms wich to supply more at a higher price
Evaluation
Elasticity
Poor suffer more as minimum prices are regressive
Knowing the level to set is hard
+ unintended consequences can lead to government failure... mainly black markets popping up from March minimum prices
Maximum Price
They are price ceilings set
bellow
the equilibrium price in the market to improve the affordability of essential goods and services
Evaluation
Maximum price creates a
shortage of AB
in the market meaning many consumer will not be able to access necessities as producers leave the market
Can be fixed by
excluding those who clearly can afford the g/s
which may be done by setting a wage that you must be bellow to be eligible for.
Consumers unable to purchase the g/s may attempt to find alternative supply in the
black market
... this will lead to price exploitation, uncertainty and loss of tax revenue... potential government failure
Dealing with the excess demand
Subsidise the producers to decrease CofP and supply more
Distribute the excesss supply themselves
these are both
very expensive
If the government can't police max price properly it won't be followed
Level matters
Property Rights and Market Failure
To solve tragedy of the commons
Ownership incentivising the owner to maintain the resource to prevent depletion or excess pollution... e.g., forests distributed between private producers... prevents depletion of resources
Furthermore... Private property is protected by owner from another producer intruding
Evaluation
Air and sea?
Costly... admin needs to draw the boundaries + strict enforcement... if there is no surplus tax revenue then opportunity cost occurs... but I mean off its going to be expensive its a large problem
Which producers to give the property rights too? Holder gains massive amounts of power... factory may no longer dump in the lake but locals can no longer then use the lake for recreation... or they pay to use it.
if enforcement is not effectively funded then producers will still exploit... this will lead to large scale government failure
Buffer Stock Schemes and Market Failure
Buying stocks when price is too low
Selling excess stocks when the price is too high
Useful in procommodity markets
Evaluation
Expensive... admin and enforcing... if no excess tax revenue then opportunity cost will be triggered and if costs outweigh the benefits then there will be government failure
Difficult to maintain... if there are consecutive bad harvests then the government will be selling large volumes... what if they run out?... potential market collapse
some agricultural goods have a terrible shelf life... not really possible for these goods
finding the right price Is rly hard
When does government failure occur?
High admin / enforcement costs
Infmormaiton problems within government.... e.g., hard to measure positive and negative externalities and effectively set the right level
Unintended consequences... e.g., black markets
Regulatory capture... idk this ev not great
Note: diagrams should be at an increasing angle to show at 0 there is 0 cost
