Chapter 10 - Government intervention in the market

market failure - where the free market fails to achieve an efficient allocation of resources, Market failure leads to productive and allocative inefficiency
1. cases
  1. (de)merit goods
  2. public goods
  3. imperfect info
  4. positive/negative externality
  5. equity issues-poverty, inequality
  6. immobility of factors of production
Cost-Benefit analysis
1. technique
  1. 1. identify all costs and benefits
  2. 2. assign a monetary value on each of these(shadow price)
  3. 3. adjust the figures for inflation, apply discount cash flow rate to get the net present value
  4. 4. compare the costs and benefits,
2. criticisms/limitations
  1. shadow pricing is not accurate, very subjective
  2. if some costs/benefits come later than expected, the net present value could be changed as the disount rate remains unchanged
  3. not all affected 3rd parties are included in cost/benefits , e.g. future generations
  4. distributional pattern not taken into account, through weightings, e.g. £10m is worth more in the West Midlands than London
  5. discount factor/inflation assumptions are subject to change
  6. large room for deviation
  7. CBA can be manipulated - optimistic forecast
government intervention
1. solutions
  1. government regulation and legislation
    1. pollution regulation
      1. can limit pollution BUT hard to enforce and monitor AND also does not generate tax revenue to compensate victims
    2. extend property rights
      1. incentivise conservation of land
      2. tragedy of the commons
      3. use pollution permits
  2. direct provision of goods e.g. nationalisation
  3. fiscal policies, subsidies, taxes
    1. environmental taxation, e.g. landfill tax, air passenger duty, fuel duty
      1. distributional problems, those that generate pay less
      2. evaluation:
        1. hard to find the value of the negative externality
        2.total pollution might not change because of different elasticities of demand for goods
        3. taxes need to be high for inelastic demand goods
        4. VAT increases are regressive
        5. may reduce international competitiveness
  4. improving the quality and quantity of information
2. gov.failure causes
  1. political self interest
  2. imperfect information
  3. unintended consequence
  4. regulatory capture

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Chapter 10 - Government intervention in the market

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