Economic Chpater 9 -market failures
Sustainbility
"meeting the needs of the present without compromising the ability of future generations to meet their own needs."
Examples of Positive externalities of production
-A company training their employees -Beekpeers
Benefits the carbon tax might have on negative externalities of carbon emissions
-Electircity provides will invest in newwer cleaner technologies that allow them to emit less carbon -Higher prices-incentive to reduce their consumption of elecitricity -Allterantive sources of energy -carbon tax generates governmnet revenue, which can be used to subsidize renewable energy to make it more affordable to everyone
The effectivnes of these permits depend on:
-How many participant are committed -Whether or not the orignal allowances are sufficient to bring about the desired change -Allocation may be problematic -the ability to acurately measure and monitor the emissions -system might be manipulated by the stakeholders
How can government reduce or elimiate the welfare loss related to negative externalitites of consumption?
-Market based appraoch: Indirect Taxes -Legislation/regulations -Raising awareness
How can the government achieve the potential welfare gain related to positive externalities of consumption?
-Subsidies (direct provision by the government) -Improving information about the benefits of the products through public awareness campaigns -Legislation
How can governments provide more public goods?
-They might provide the public goods themselves -"direct provision" by using the tax money -"public-private partenrship"
Examples of positive externalities of consumption
-Vaccines If a certain percentage of the population is immunized against a certain harmful disease, then it minimizes the spread of the disease -University education More skilled and specialized workers, higher quality workforce -Sports facilites A "fitter" population is more productive population
Public good
-national defense -flood barriers -streetlight
Examples of negative externalities of consumption
-smoking is harmful to the individual, it can cause lung cancer and many other lethal diseases. But it also produces second-hand smoke which affects by-standers (smell & potential harm). -petrol or diesel for driving cars, it pollutes the air, damages the environment, and accounts to the enhanced greenhouse gas effect. (Not a demerit good, does not have a harmful effect on the driver) -Alcohol (damages brain cell can lead to liver cancer) & anti-social behavior (Drunk driving, inappropriate behavior) -Unhealthy food, health consequences such as high blood pressure, diabetes, problems associated with being overweight
How might carbon tax reduce or eliminate negative externalities of production and reduce the threats to common pool resources?
A "carbon tax" it a tax imposed when fossil fuels are burnt. When users of fossil fuels are taxed for their carbon emissions, it is a way of them making them pay for the external costs that are not included in the market price. This follows the "polluter pays" principle, which argues that those who create pollution should be forced to pay for it - that is, it is a way of internalizing an externality. A carbon tax is a Pigouvian tax aimed to eliminate the negative externalities associated with burning fossil fuels. To completely reduce the negative externalities associated with emitting carbon, governments need to accurately calculate the external costs and set the tax to reflect these costs. MPC + tax
Externality
An externality occurs when the production or consumption of a good or service has an effect upon a third party. If the effect is harmful, then we talk about negative externality. This means that there is an external cost that must be added to the private cost to society. If the effect is beneficial, then we talk about a positive externality.
What causes over consumption of demerit goods?
Because there is a free market, consumers will maximize their private utility (benefit) and consume at the level where MSC=MPB. They will ignore the negative externality that they are creating. This means that they will over-consume the demerit goods. Too many resources are allocated to this market from society's point of view and the good is overproduced
Example of tragedy of commons
Commercial fishers, taking into account only their own costs of production, have the incentive to catch as many fish as they can, ignoring the external costs. Which might result in collapse of fishing stocks and the ultimate loss of livelihood in the future, along with many other ecological problems. Overfishing occurs when more fish is caught than the population can replace through natural reproduction
Common pool resources
Common pool resources are very difficult or expensive, to exclude others from using them. Thus, they are considered to be non-excludable. In addition, if one person uses the good, it reduced the value of that resource to others. In this sense, common pool resources are said to be rivalrous. In the absense of proper managemnet, common pool resources are inevitably degraded
Consumer nudges - Negative externalities of consumption
Consumers do not always have perfect information and do not always make rational choices. they may be poor at judging the utility of a product when the benefits are enjoyed in the present +peer pressure +limited will power Nudge theory -consumers still have a choice to use a demerit good but are enocuraged/nudged not to consume it
Demerit goods
Demerit goods are goods that are harmful to consumers, but people who consume them are either unaware of the possible harm, or they ignore the possible risks. That is, consumers have imperfect information about the potential costs to themselves, and to others. Therefore, the demand is higher than it "should" be from society's perspective. Demerit goods also create negative externalities when consumed
Compare command and control response with market based approach when dealing with negative externalities of production
For example, if a governmnet wanted to reduce the amount of singe-use palstic bags being given out by the supermarkets, they could use a command and control approach by banning supermarkets from giving out plastic bags, or they could use a market-based approach by making the supermarkets charge a fee for the bags.
What are the advantages of using Public awareness as a method of reducing welfare loss related to negative externalities of consumption?
Given that in the real world consumers do not necessarily have perfect information of the damage the demerit good might cause them, it is possible that the governmnets could increase the information avilable by suing education system or funding public awareness campaigns in order to reduce the demand. Shifting the MPB curve to the left closer the MSB curve.
Advantages of legislation as a method of gaining the potential welfare related to positive externalities of consumption
Governments could pass laws insisting that citized consume the merit goods. But this will only be successful if the government provides the services free of charge.
How might tradable permits reduce or eliminate negative externaltieis of production and reduce the threats to common pool resources ?
In a tradable permits scheme, a governing body sets a limit on the ability of users to access a resource (maximum amount of resources that can be consumed or produced). the governing body body than divides up and allocated the toal amount into individual amounts, which are essentially "permits" t ouse, or access the resources. Owners of the permit can use the permit themsleves, or exchange them in a market (sell the remaining permits to other companies for profit). It is amrket based appraoch, because it creates a market for emmisoins. An advantage of such a scheme is that it gives producers the incentive to adopt cleaner technologies, so that they do not have to buy carbon credits.
What are the disadvantages of using Public awareness as a method of reducing welfare loss related to negative externalities of consumption?
In addition to costs involved, there are some doubts as to the effectivness of education and public awareness capaigns in temrs of reducing consumption of certain goods. As to why, there are several suggestions. It is possible that the consumers are aware of the potneital risks, but manage to convince themsleves that they will not be affected, or the consequences are not as significan as others make it out to be or the consequences will be felt too far in the future to worry about it.
Market failure
In the "real-world" marekts are not perfect. That is, they are not allocatively efficent. Surplus is not maximized and we say that this is a market failure. When market fail, government interven to eliminate the market failure and move towards the optimal allocation of resources
Why does negative externality of production occur?
In the absence of government intervention, profit-maximizing producers only take into account their private costs of production and are unconcerned about the costs that may impact upon other people now and in the future.
What are the disadvantages of using legislation and regulations as a method of reducing welfare loss related to negative externalities of consumption?
Increased regulation or legislation may be met with opposition fro mthose who argue that they take away the right of consumers to choose for themselves When regulations are effective in changing the behaviour of consumers, this will have a negative impact on the porducers of the product. In many cases, the producers of the product lobby the government to prevent them from bringing in new legislations. Regulations may also be difficult to implement (especially if it involves other countries). It will be necessary for the governmnet to allocate resources to ensure that the stakeholders comply with regulations and those who don't recieve a certain punishment.
Disavantages of the governments using Subsidies as a method of achieving the potential welfare gain related to positive externalities of production
It is very difficult for the government to estimate the level of subsidy to be granted to every individual firm. The cost of the subsidies would imply an opportunity cost. The government would be forced to make a choice about its spending and cut back on spending in other areas.
What are the advantages of using legislation and regulations as a method of reducing welfare loss related to negative externalities of consumption?
Legislation (laws) and regualtions alter the behaviour of consumers. This is known as "command and control" approach. Types of restircitons: Age restrictions on alcohol and cigarettes, complete ban on consumption of a certain good, limits. Advertisemnt bans & informtive packaging.
Positive externality of cosnumption
MSB > MPB
Positive externalities of production
MSC > MPC
When negative externality of production occurs
MSC > MPC
Merit goods
Merit goods are goods that are benefitial to consumers, but people might not consume them enough, either because they underestimate the potential benefits or because they choose to ignore the potnetial benefits. That is consumers have imperfect information about the potenital benefits. Therefore, the demand for the good is lower than it "should" be from society's perspective
Disadvantages of Subsidies as a method of gaining the potential welfare related to positive externalities of consumption
One key problem with such solution is cost and the opportunity cost involved. Governmnets have limited resources and must make choices about how to allocate resources. Any increase in any apsect of spending of merit good is likely to require a cut in spending elsewhere Political considerations should also be noted. We must not make assumption that spending on a certain merit good is always everywhere a governmnet priority.
Disadvantages of legislation as a method of gaining the potential welfare related to positive externalities of consumption
People may resent the laws of this sort being imposed by the government. They may see it as an infrigement of their civil liberites.
Why is lack public goods considered a market failures?
Public goods are goods that would not be provided in a free market. Since they are goods that benefit the society, alck of public goods is consdiered a market failure
Advantages of Advertisement as a method of gaining the potential welfare related to positive externalities of consumption
Since consumers might not have perfect information about the potential benefits of consuming a particular merit good, the governmnet could use public awareness campaigns to make people more aware of the benefits. This would shift the MPB curve to the right, towards the MSB curve.
Collective self-governance
Since the communities who use the resources have the greatest incentive to ensure its sustainability, they should eb the ones developing the rules for tis management. Fruthermore, the users of the resources are more likely to implement, and neforce those rules since they are the ones to benefit if the rules are followed.
Free rider problem
Some producers could voluntarily reduce their production to prevent the degradaition of theresources. Yet this would give rise to the "free rider problem". Those that do not change their behaviour would benefit from those who do. In the absence of intevnetion, a profit seeking producer would not do this if others were going to continue profiting at their expense.
What are the advantages of using Indirect taxes as a method of reducing welfare loss related to negative externalities of consumption?
The government could impose a Pigouvian tax on the demerit goods, in order to reduce consumption. A Pigouvian tax is an indirect tax that is imposed on any market that creates a negative externalities. In order to eliminate the externality. If the government imposes an indirect tax, then that will shift the MSC curve upwards to MSC+tax. This wil lreduce the consumption to the socially efficient level of output at Q* but the price to the consumers will be at P2. the government will gain significant revenue and this may be used to correct some of the negative externalities that were caused by consumption of demerit goods.
Evaluate using Direct provision as amethod of achieving the potential welfare gain related to positive externalities of production
The government could provide vocational training through the state, by setting up training centers for workers in certain industries. Although, the costs would be high and it might dissuade firms from offering training of their own
Advantages of the governments using Subsidies as a method of achieving the potential welfare gain related to positive externalities of production
The government could subsidize firms that offer training, this would shift the MPC curve downwards by the subsidy. If full subsidy is given then MPC would be the same as the MSC and the scoially efficient point would be achieved.
What are the Disadvantages of using Indirect taxes as a method of reducing welfare loss related to negative externalities of consumption?
The inelastic demand for certain demerit goods tends to mean that taxes do not manage to reduce the quantity demanded very much so. Inelastic goods and services are not affected by changes in their price. While government revenue is raised significantly, quantity demanded does not fall to the socially optimum efficient level. If the taxes are raised too much then people start to look for other sources of supply, where the product is cheaper. Consumers may purchase the product elsewhere so the government does not gain the tax revenues. Indirect taxes are regressive. Their impact is greater on lower-income people than higher-income people. Higher income and lower income people pay the same amount of tax, but this takes up a larger proportion of income from lower income people.
What happens to pirvate utility when there is negative externaltiy of consumption?
The priavte utility is demenished by the negative utility suffered by the third parties
Disadvantages of Advertisement as a method of gaining the potential welfare related to positive externalities of consumption
The problem here is that there may be a higher cost to providing advertisment. Campaign advertisment are not always sucsseful and can be quite costly.
Tragedy of the commons
The tragedy of the commons is an economics problem in which every individual has an incentive to consume a resource but at the expense of every other individual. If everybody does act in their apparent own best interest, it results in harmful over-consumption which ultimately leads to total depletion of reources. For a tragedy of the commons to occur a resource must be scarce, rivalrous in consumption, and non-excludable
negative externalities of consumption
There are many goods that, when they are consumed by individuals, adversely (harmfully) affect third parties.
Potential problems associated with the environment due consumption of deemrit goods
There are many products whose consumption creates significant environmental problems that imapct other today, and through the impact on the environment are also creating threats to sustainability
What are negative externalities of production ?
These occur when the production of a good or service creates external costs that are damaging to third parties. These relate mainly, but not exclusively, to environmental problems, where economic activity has resulted in clear threats to sustainability.
Why aren't public goods provided enough in a free market?
They are non-excludable and non-rivalrous and that makes it pointless for producers and consumers to provide and pay for the product. (gives rise to the free-rider problem) no one is willing to pay for the good, in the hope that someone else will pay for it instead. As a result, the good will not be provided at all in a free market -Technologies are not making it much easier to charge for the public goods
Why do governments aim to reduce the quantity consumed of demerit goods ?
This will benefit the consumers themselves, but most importantly it will reduce the welfare loss to society as a whole
Positive externalities of production
occur when the production of a good or a service creates externalities that are benefitial for third parties.
Evaluate overall whether governmnet intervention to achieve potential welfare gain related to positive externalities of production a good idea
regardless of costs, or who pays the costs, economics benefits enormously from the training and retraining of labour. Any improvement in the quality of labour, a factor of porduction can shift our an economy's PPC later.