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Policies - Coggle Diagram
Policies
Minimum price
Pros and Cons
Pros
Legally enforced minimum wage
Prevents the overconsumption of demerit goods
Cons
Consumers may pay higher prices
Tax revenues are needed to purchase the excess supply
Used in negative externalities (Overconsumption)
Definition: Lowest limit on a price set by a government to an organisation
Maximum price
Pros and Cons
Pros
Good for low income consumer and increased welfare
Prevents the exploitation of consumers
Cons
Create shortage, this can lead to black market
Increased prices
Used in positive externalities (Underconsumption)
Definition: Highest limit on a price set by a government to an organisation
Indirect tax
Pros and Cons
Cons
Difficult to set the right tax level
Have almost no effect on inelastic demand good
Pros
Internalise the external cost
Tax revenue
Used in negative externalities (Overproduction)
Definition: A tax levied on goods or services rather than a company or an individual
Tradable permit pollution
Pros and Cons
Pros
Price mechanism is used to internalise the external cost
Market is created for buying/selling carbon permits
Cons
Too many permits may be issued
Increased cost of production => Less market competitiveness
Used in Negative externalities (Overproduction)
Definition: A limit a firm can emit greenhouse gases imposed by government
Subsidies
Pros and Cons
Pros
Welfare of society
Internalise the external benefit
Cons
Cost to government
Future taxes are going to increased to cover the cost of subsidy
Used in positive externality of consumption (Underproduction)
Definition: A financial aid given by government to a group or individual