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Market Failure and Government Response
1. Externalities
  1. Negative
    1. Production
      1. MSC > MPC
        E.g. Pollution
    2. Consumption
      1. MSB < MPB
        E.g. Cigarettes
    3. Government Respose
      1. Taxation
        Disadvantages
        Difficult to estimate the spillover effect
        Price inelastic D or S have little effect
        Income inequality
        Loss of international competitiveness
        Creation of black market
        Advantages
        Direct Impact
        e.g.Carbon tax
      2. Tradable Permits
        Reduction of Pollution
        Quotas
        Incentive to be environmentally efficient
        More efficient firms buying more to produce more
      3. Regulation
        Measure and set standards for firms to comply
        However,...
        Difficult to set an optimal limit
        Cost of regulation
        Disincentive to change, when benefits from staying outweigh the costs of change
      4. Extending property rights
        Regulated through legal rights
        Not effective in ELDCs due to lack of legal system
      5. International co-operation
        UN Reduction on greenhouse gases
        Political problems
        Still 30 countries are committed to reach the outcome
  2. Positive
    1. Production
      1. MSC < MPC
        R&D in technology
    2. Consumtion
      1. MSB > MPB
        Vaccines
    3. Government Response
      1. Subsidy
        Hard to estimate MEC
        Opportunity Cost on other social benefits
        PED > 1, ineffective
      2. Free provision
        e.g Education, healthcare
        Lack of funding especially in ELDCs
      3. Information
        Educate the population
        Make informed choices
        Could be inefficient
        Government expediture
  3. the costs or benefits of production or consumption that are experienced by their parties but not by the producers and consumers who cause them
2. Merit and Demerit Goods
  1. Merit goods
    1. consumers consume too few goods and services that are seen as being good for them
      1. e.g. Education
  2. Demerit goods
    1. consumers consume too many goods and services that are seen as being bad for them
      1. e.g. alcohol
  3. Preferred solution: Education and Information on choices
3. Common Access Resources and Sustainability
  1. CAR - are resources that are available to everyone without payment, do not have a price, and are not woned bt anyone
    1. e.g. Air, biodiversity
    2. non-excludable but rivalrous
  2. Sustainability
    1. resources are used today in such a way that does not compromise their use by future generations
      1. Response similar to negative externalities
        Economic activities threatens sustainability
  3. Requires International co-operation
    1. EU emissions Trading System
4. Public Goods
  1. non-excudability
    1. even if you have paid for a good you cannot confine its use to yourself
  2. non-rivalry
    1. the consumption of a good does not reduce its availability to others
  3. "Free rider" effect
    1. e.g. National defense or street lamps
5. Asymmetric info
6. Abuse of monopoly power

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	Created by Han Zhang over 11 years ago

	Copied by Yash Kedia almost 9 years ago