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Section 5 - Government failure - Coggle Diagram
Section 5 - Government failure
Tradeable pollution
Limit amount of negative externalities in the form of pollution
Firms can pollute up to a certain amount, and any surplus on their permit can be traded
Advantages
Benefit the environment in the long run
Government can raise revenue from permits
If permits are exceeded, they'll need to be purchased from other firms. This raises revenue for greener firms
Disadvantages
Could lead to relocating
Higher production costs may be passed onto consumers
Permits might create a barrier to entry for potential firms
Monopolies
Higher prices and profits may result in a misallocation of resources compared to a competitive market
Can exploit the consumer through higher prices
Good is under consumer, allocative efficiency is lost
No incentive to become more efficient as they have few/ no competitors
Income distribution
Income - flow of money
Wealth - stock of assests
Individual's ability to consume depends on their income and wealth and if income isn't equally distributed, it may lead to a misallocation of resources
Progressive tax/ government spending can reduce inequality
Welfare payments reduce inequality
Causes of government failure
Price signals
Subsidies can distort price signals by distorting the free market mechanism
Could be an inefficient allocation of resources as the market mechanism isn't able to act freely
Industry which is failing might be subsidised
Unintended consequence
Producer/ consumer have unexpected consquence
Policy could be undermined and make policies expensive to implement
Excessive costs
Social benefits of a policy might not be worth the financial cost of administering the policy
Government has to think whether the policy is good value for money
Information gaps
Policies may be decided without perfect information
Assumptions are often made
Buffer stocks
Stabilise prices and prevent shortages in supply
Government sets a maximum and minimum price
When market prices goes below the price floor, the governmetn buys it stores it in stockpiles, this increases demands and increases price
When the price goes above the price cieling, the government sells the product from its stockpiles, this increases supply and price is brought down
Only works for storable goods
Problems
If minimum price is too high, it'll lead to excessive spending
Storage of stockpiles can be expensive
Producers may over produce as they will get a guaranteed minimum price, this can lead to a waste of resources
State provision
Governments might provide certain things to increase the consumption of merit goods, like education
Free provision can reduce inequalities and redistribute income
Disadvantages
Less incentive to operate efficiently due to the absence of the price mechanism
May fail to respond to consumer demands
Opportunity cost that other goods can't be supplied
Healthcare
Government funds the NHS so that society benefits from the positive externalities of health care
Has led to excess demand
Value judgement made by the government on how much they think should be supplied
Regulation
Rules enforced by an authority that are backed up by legislation
Aims
Reduce use of demerit goods
Reduce monopoly power
Provide protection for consumers
Difficulty
Governments might not have enough information to know what is the correct level to regulate
Excessive regulations may cause firms to close or move location
Monitoring compliance is expensive
Renewable energy
Renewable Obligation certificates (ROCs) encourage the use of power generated from renewable energy sources
Supplies are given a minimum % if power that must come from renewable sources
Suppliers that fall short have to pay a financial penalty
Money from penalties is shared between suppliers who reached target